Trading Efficiency What is it Really?

NetProfit · May 6, 2002

What is trading efficiency?
Differs with different trading styles
Long term
Swing
Day Trade
Scalper
If commish costs are $5 and one makes 95 net is that any more efficient than commish of 30 and net of 60?
What about the risk taken to achieve the above net profit?
For a day trader commish is crucial to obtaining a daily profit.
For the long term system trader, there may be no problem in using a "system broker" to manage trades if it means more time windsurfing or golfing. That sound like "efficiency" to me.

What does trading efficiency mean to you?

Babak · May 6, 2002

Tony Oz : My definition of a good active trader (over 20 round trip trades a month) is someone who is profitable and has earnings to commission ratio greater than 5. [quote/]

NetProfit · May 7, 2002

Originally posted by Babak

Tony Oz : My definition of a good active trader (over 20 round trip trades a month) is someone who is profitable and has earnings to commission ratio greater than 5. [quote/]

More...

so for this rule of thumb as it applies to scalpers ON AVERAGE:

a $ 5/trade emini snp scalper would bank at least $25 per trade and since the mini snp moves in $12.5 ticks need at least .75 pts or $37.50 minimum to keep at least a 5:1 profit:commish ratio. Add in slippage in using market orders to exit then add at least 1 tick in and one tick out so were now at $62.50, unless one has a rigid system where immediately upon entry profit targets are set to take one out of a trade at lets say 1 point away.

a $9.95/trade stock scalper would need to bank at least $50 per trade, don't do stocks so any input on how easy/hard given brokerage considerations would be appreciated.

not a bad baseline

bone · May 7, 2002

I use a 4:1 ratio for a profit-to-commission ratio. 5:1 would be even better. Either way, this is one of the most important facets to trading that I have ever come across. I track this on an excel spreadsheet on a daily basis. I have found that I can predict when I am about to have a crappy day when this ratio gets too low. A low ratio means that I am forcing trades and making too many decisions with marginal risk/reward skewness. Bad, very bad. Once I got my arms around this fact, I had my most profitable year ever. Never looked back.

metooxx · May 7, 2002

Originally posted by Babak

Tony Oz : My definition of a good active trader (over 20 round trip trades a month) is someone who is profitable and has earnings to commission ratio greater than 5. [quote/]

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Disagree; from a high volume trader.

bone · May 7, 2002

Metoox has a point. Twenty round trips PER DAY is more like an "active trader" in my book. And with that kind of volume, a lower ratio is more realistic (3 or 4 :1). If I only took one trade per day, I'd better have a higher ratio because the drawdowns are probably going to be greater. Tony Oz would crap his pants over my volume.

Don Bright · May 7, 2002

Don't scream, but Tony"s definition is a bit broad I would think.

1 trade a day is not what most of us would call "active" is it? I know that our people may be a bit extreme, but 20 a day is not considered active for most professional firms.

Efficiency does not mean as much as net profitability, does it? Would you rather make a nickel on a million hamburgers, than 50 cents on 100??

Anyway, this is a good exercise, and I'm interested in what most of you are doing, share wise and trade wise per month.

There are many ways to make money in this business.

Don

TigerO · May 7, 2002

Originally posted by Don Bright

There are many ways to make money in this business.

Don

Depends on the kind of money you want to make, and on your ability to accept risk and equity volatility.

If you're after big money you need to go after big swings and trade stuff where you can compound and be willing to accept larger drawdowns.

If you're less risk accepting you'll limit your potential income and trade shorter time frames.

But, and that's an important point, I think it's still easier to print money trading longer term than extremely short term, plus you get, at least theoretically, unlimited upside.

Although trading short term can be done by a select few, no question.

bone · May 7, 2002

Can you tell it's a slow day in the bonds today? I'm only here today, on an FOMC meeting day, because it's raining in Chicago and the other alternative is lunch with the in(out)-laws. Besides, slapping around the Frenchman on the IB thread has been most entertaining.

In terms of trading efficiency and volume, I've come to the point where I bid or offer them and frequently get partials. A lot of smaller traders fading size or waiting because they see the big order is getting frustrating. So, I have to pull stuff, go to market, play games, or scale to get them all. That is another way that my ratio goes down. It's hard enough having a large position, and then you have to pick and choose your moments to get out of them. Not very efficient.

Babak · May 7, 2002

Don, metoox, bone:

I think you didn't notice that Tony said "over" 20 per month. He used that as a minimum. Not an average or a maximum, which it seems is the way you have interpreted it.

Anyway, that is the least important part of his point. The fact is that if this key ratio is low then dangerous things start to happen. In the worst case, you could grind yourself out of the game and in the best case you could end up working for your broker rather than yourself.

Originally posted by Don Bright
Efficiency does not mean as much as net profitability, does it? Would you rather make a nickel on a million hamburgers, than 50 cents on 100??

I beg to differ. Trading efficiency means much more than profitability. Why? because trading efficiency is a glimpse into how you trade whereas your profitability is a snapshot of where you are right now.

If you are not trading 'efficiently' then if something changes even a little bit, then your margin of profitability is quickly eroded and you are negative before you know it.

The hamburger analogy is baffling. I don't know what it proves or what in the world you are trying to say.

Which would you prefer? a trader at your firm who trades 1 million shares a day and makes on avg $1000/day or one who trades 10,000 shares a day and makes on avg. $1000/day? The conflict of interest is clear Don.