Damn, the implied volatility of this thread really picked up. LOL.
OK, there is some MAJOR misunderstandings going on here. Let me try to clarify what I think some of the issues are. First of all, nobody is saying you can't make money trading. In fact, it's quite the opposite. The question is, can you make more then your opportunity cost and with less variance. THIS is a major issue. Let me try once again to use my firm and my experience in this example. Most of the guys who traded at my firm actually did make money at one time or another. If we pretend they never blew out and just kept making the amount of money they did when they actually were and let's also not question how they made it, i.e. was luck involved or did they have an edge, etc. I saw their sheets. I saw their return on capital. I saw their overnight haircuts and equity balances. So here is the billion dollar question. If we extract only the very best periods they ever had and then compared that with their TOTAL "economic" cost which in case you don't know, also includes their opportunity cost and then also compare the variance between the two, we can analyze exactly how they potentially could have done in this perfect theoretical world where we only accept the data from the very best performing periods.
So how do we do this math. For one, we could by default just assume they took their account which usually was somewhere between 50k and 100k and invested it in the SP 500. The historical return I believe is around 7.5% to 8%. Now we have to factor in what they could have made had they chosen their next best alternative which in most cases, is the job they left to come to our firm. Let's just use a default 50k account for this example. The long term standard deviation for the sp 500 I think is around 19% annualized.
So let's try to lowball all these numbers a little. Let's say the next best alternative for the avg guy (I should point out most of these guys were educated and therefore had decent earnings power in the job market) is making 60k a year. This was in Chicago btw and I'm really lowballing these numbers here. So if they took their 50k and invested it in an index and stayed at their 60k a year job they would have over two years (about their avg stay at the firm) about 15k in profits from their investment and 120k in income for a total of 135k pre-tax. And their std dev? Pretty low if you factor in the steady paycheck.
Now I already spoiled the ending by telling you most left with nothing which means not only did they forgo the 135k in economic cost but they lost on avg 50k in trading for a total loss of 185k. Now, by sticking them into our utopian world where they don't lose money trading and we only allow them to operate at their max return period, we have to ask ourselves, even in this artificially manipulated world, could they outperform? Well I can tell you this, NONE of these guys generated 135k in any two year period. On avg, the best guys showed "marginal" positive returns. So when we analyze this, we see that even under the best circumstances, by choosing to trade, they dramatically underperformed their total economic cost and I can't even begin to calculate their std deviation. Some of these guys had 50% swings in their account in a single day. LOL. The std dev numbers would be off the chart so suffice it to say, let's just not even look at that.
So this is how one should critically evaluate the situation. Now, let me throw some caveats out there. One of the main problems these guys had obviously was lack of edge. In fact in most guys when they made money, it was from either selling option premium in an up market or simply being long stocks in a rising market. Second, I understand the argument will be brought up "I don't want no stinking job". That is fine and that comes down to something in economics we call utility, which we actually can measure btw. The utility simply stated is simply the joy or satisfaction one gets from their choices. Think of the guy who quits his lawyer job to open a tackle and bait shop. This decision appears on the surface to be irrational on his part however it turns out he gets more joy and satisfaction making less money doing something he likes then being a lawyer. So I understand for some the utility of working from home in your boxer shorts answering to nobody is your idea of positive utility. That is fine and that is a personal choice but for the purpose of economic comparisons we leave this out.
Another argument I KNOW I'm going to hear is "he could lose all his money if the market crashes". So this brings in something also from economics the latin phrase "ceteris paribas" meaning holding all things constant. We can not predict if the market is going to crash no more then we can predict if he is going to blow out his account. Both could happen. We simply use the long term overall market returns as a baseline for our analysis.
Now the intangibles. Obviously he has the potential to hit it big. At a prop firm or even a retail futures account, there is more then enough leverage to potentially earn very high returns. But remember, factor in std dev. Is he really earning more on a risk adjusted basis? Perhaps in any given year but over a very long period of time think about how much money he has to make to keep with the compounding of his job and his index investment. One bad year and it will set him bag big time in the race.
Some closing thoughts. Am I suggesting everyone quit trading to get a job. Good god no. This is simply statistical analysis and ignoring it would be like going to the doctor who tells you that you have cancer and you simply ignore him because you don't like where he went to medical school. All this means is you have choices to make and everyone will make different choices. Ultimately trading wise most people have a finite amount of capital so the market usually does a good job of helping you make that choice. Second, I can tell you from my own observation that the data I used in this example consisted of traders who did not have an edge and as we all know from our high school and college statistics classes, with a negative expectancy the only unknown variable really is time. In other words, it's not a matter of if but when they run out.
Of course lots of people will come forward and talk about the edge they have and why they are different. I really have no interest in arguing that as it will be full of ambiguity and conjecture. If you say you have an edge, then by golly you have one. But I want to point something out here. And this is to bring this back to TST. The reason as I have stated God knows how many times, these guys are failing is because they lack a real hard edge and are simply trying to make it on variance alone. In other words, they are hoping their variance is higher then the markets. If it's not, the rules of TST will act as a wall. Think of variance as selling a no touch option with the touch being the daily or combine drawdown limit. You've sold this option and as long as the market never touches the touch price, you are fine. If it does, you are out. So that means if the actual observed variance of the market turns out to be "greater" then what your strategy allows, the result will be negative. If it's less, the result will most likely be positive. I made the comment to one of the posters on another thread that the key to daytrading is not simply having an edge but making sure the variance of the intra-day market is less then what you are controlling for. This is less of a concern for longer term traders since the p&l is generated more from absolute returns rather then intra-day leverage.
That is all from me. To sum up a very long post, have an edge, calculate your total economic cost. Factor in your total utility. And be honest with yourself about the data and the results. You can lie all you want on ET, nobody here really cares at the end of the day. Just don't lie to yourself. There are a lot of ways to make money in the world, try to find that value. Try to price it. Measure it's risk. And check your gut. And of course, good luck!
What % of traders were net profitable at your firm ?
What years were this?
Do you have any stats on traders who were net profitable and what their mbti classification was?
