My Brethren,
Firstly, let's lay out a few realities... the majority of traders who attempt to make a living will wash out... some say the figure is as high as 90%+, some say its as low as 70%... but I think that most can agree that its the majority who lose at this game...
Secondly, it has struck me that many people on these boards scoff at the notion of a long-run return of say 1pt per contract per day on the S&P Emini... let's clarify that such a long-run return is based on the long-term market cycles of "easy" trading periods and "difficult" trading periods... and such an average is calculated from days that include 10 pts+ per contracts, days with gains of 1pt, days with losses of 3pts, days with no trades, flat days etc etc... just to reiterate, the 1pt a day is an average outcome, not a daily target...
Thirdly, it has struck me that in several quarters, people are somehow mistakenly suggesting that 1pt a day is somehow related to scalping... however, I would assert that such an average can be strategy-independent i.e. if you are consistent at your strategy/strategies, it's possible to make just as much scalping as holding on for more... the major difference will be in drawdowns size and volatility, not in returns...
Now let's see what 1pt a day per contract actually means... before doing so, let's make a few assumptions:
1) the 1 point day average is scalable across any number of contracts... one concedes that, with multiple contracts, there may be scaling in and scaling out, so the simplifying assumption has to be that scaling in and scaling out has negligible impact on the long run average...
2) the 1pt a day is net of all commissions and costs...
3) that a 1pt a day average isn't somehow the "magic number" as to what to reasonably expect... its simply chosen to demonstrate something that most people would agree is a ballpark reasonably achievable long-run daily average for a consistent trader...
4) that we are calculating an annual outcome for a given contract level at a given time... of course in reality, we can scale up with profits or scale back with losses... given that we are examining this issue in the context of a successful and consistent trader, the following analysis is therefore likely to be an underestimate of the annual outcome, further reinforcing the argument...
OK, onto the implications of 1 point a day per contract on the ES...
The consistent and aggressive trader, with the stomach to endure some major drawdowns on his equity curve (or the lucky and undercapitalized newbie, who has yet to experience his "real" learning curve)
Let's start off with a trader who uses $5000 per contract and who trades 250 days a year... if the margin required is $2000 per contract, this trader is funding his account by a factor of 2.5x the margin (this is slightly more aggressive than the performance statistics used on futurestruth, which calculates returns based on 3 times margin)... given assumptions 1) - 4) above, 1pt a day will generate $12,500 (the point value on ES is $50)... so the trader will have $17,500 per contract at the end of the year in his account... the annual return is 17,500/5,000 which expressed as a % is 250%... how can this be scoffed at and looked down upon? This is a fantastic outcome, not a mediocre one...
The consistent, standard trader
Now let's deal with a more conservative trader who funds his account with $10k per contract (has covered 5x margin of say $2000)... this conservative approach is a highly common practice amongst traders... again, 1pt a day produces $12,500, so the trader will have $22,500 per contract in his account at the end of the year... the annual return (given the various assumptions 1-4) is 22,500/10,000 which expressed as a % is 125%... again, this is a highly impressive outcome...
The consistent, well-capitalized and highly risk-conscious trader
Finally let's consider the case of a risk-conscious and well-capitalized trader who wishes to use $20,000 per contract (the assumed $2k margin has been covered by a factor of 10)... this wise trader produces $12,500 per contract, and will have $32,500 per contract at the end of the year... so a well-capitalized trader who trades with $20,000 per ES contract will have generated 32,500/20,000 or a 62.5% return that year... hedge funds will kill for that kind of return...
The purpose of this thread was simply to demonstrate that even a so-called "crappy" 1pt a day has fantastic implications for your trading, assuming that it is your long-run average gain... given that the vast majority of traders are losers, I can only conclude that people who scoff at the notion of 1pt a day as an average either have unrealistic expectations or are amongst the very best traders around...
Fraternal wishes,
Candle
P.S. I make no apologies for any minor methodological weaknesses, as the point of this thread is to make a general observation, and is not to describe (in any exquisite detail) a groundbreaking analysis... please note that there are alternative ways to determine the number of contracts to trade (the above way was used purely for simplicity of exposition in making an observation about potentially unrealistic expectations)...
Firstly, let's lay out a few realities... the majority of traders who attempt to make a living will wash out... some say the figure is as high as 90%+, some say its as low as 70%... but I think that most can agree that its the majority who lose at this game...
Secondly, it has struck me that many people on these boards scoff at the notion of a long-run return of say 1pt per contract per day on the S&P Emini... let's clarify that such a long-run return is based on the long-term market cycles of "easy" trading periods and "difficult" trading periods... and such an average is calculated from days that include 10 pts+ per contracts, days with gains of 1pt, days with losses of 3pts, days with no trades, flat days etc etc... just to reiterate, the 1pt a day is an average outcome, not a daily target...
Thirdly, it has struck me that in several quarters, people are somehow mistakenly suggesting that 1pt a day is somehow related to scalping... however, I would assert that such an average can be strategy-independent i.e. if you are consistent at your strategy/strategies, it's possible to make just as much scalping as holding on for more... the major difference will be in drawdowns size and volatility, not in returns...
Now let's see what 1pt a day per contract actually means... before doing so, let's make a few assumptions:
1) the 1 point day average is scalable across any number of contracts... one concedes that, with multiple contracts, there may be scaling in and scaling out, so the simplifying assumption has to be that scaling in and scaling out has negligible impact on the long run average...
2) the 1pt a day is net of all commissions and costs...
3) that a 1pt a day average isn't somehow the "magic number" as to what to reasonably expect... its simply chosen to demonstrate something that most people would agree is a ballpark reasonably achievable long-run daily average for a consistent trader...
4) that we are calculating an annual outcome for a given contract level at a given time... of course in reality, we can scale up with profits or scale back with losses... given that we are examining this issue in the context of a successful and consistent trader, the following analysis is therefore likely to be an underestimate of the annual outcome, further reinforcing the argument...
OK, onto the implications of 1 point a day per contract on the ES...
The consistent and aggressive trader, with the stomach to endure some major drawdowns on his equity curve (or the lucky and undercapitalized newbie, who has yet to experience his "real" learning curve)
Let's start off with a trader who uses $5000 per contract and who trades 250 days a year... if the margin required is $2000 per contract, this trader is funding his account by a factor of 2.5x the margin (this is slightly more aggressive than the performance statistics used on futurestruth, which calculates returns based on 3 times margin)... given assumptions 1) - 4) above, 1pt a day will generate $12,500 (the point value on ES is $50)... so the trader will have $17,500 per contract at the end of the year in his account... the annual return is 17,500/5,000 which expressed as a % is 250%... how can this be scoffed at and looked down upon? This is a fantastic outcome, not a mediocre one...
The consistent, standard trader
Now let's deal with a more conservative trader who funds his account with $10k per contract (has covered 5x margin of say $2000)... this conservative approach is a highly common practice amongst traders... again, 1pt a day produces $12,500, so the trader will have $22,500 per contract in his account at the end of the year... the annual return (given the various assumptions 1-4) is 22,500/10,000 which expressed as a % is 125%... again, this is a highly impressive outcome...
The consistent, well-capitalized and highly risk-conscious trader
Finally let's consider the case of a risk-conscious and well-capitalized trader who wishes to use $20,000 per contract (the assumed $2k margin has been covered by a factor of 10)... this wise trader produces $12,500 per contract, and will have $32,500 per contract at the end of the year... so a well-capitalized trader who trades with $20,000 per ES contract will have generated 32,500/20,000 or a 62.5% return that year... hedge funds will kill for that kind of return...
The purpose of this thread was simply to demonstrate that even a so-called "crappy" 1pt a day has fantastic implications for your trading, assuming that it is your long-run average gain... given that the vast majority of traders are losers, I can only conclude that people who scoff at the notion of 1pt a day as an average either have unrealistic expectations or are amongst the very best traders around...
Fraternal wishes,
Candle
P.S. I make no apologies for any minor methodological weaknesses, as the point of this thread is to make a general observation, and is not to describe (in any exquisite detail) a groundbreaking analysis... please note that there are alternative ways to determine the number of contracts to trade (the above way was used purely for simplicity of exposition in making an observation about potentially unrealistic expectations)...
