What and how to effort for profitable trading?

[ironchef]

Any trader with a Sharpe ratio less than 2.0 will have lumpy returns. Will not be profitable every year.

You need a Sharpe ratio of around 2.5 to be profitable almost every year, ideally 3.0. Maybe some elite discretionary day traders can maintain that for decades. But i will admit not having a sharpe ratio as high as that over the long run.

The only hedge fund in the world that can do that at scale is Rentec Medallion.

The closer your sharpe ratio is to 0.0 vs 3.0, the more random your returns will look like.

There is also the issue of fat tails, you can be happy grinding between -20% to 100% a year say between 2003 and 2007, then 2008 comes along and you make 1000%, would still describe those returns as lumpy? What are you supposed to do in 2008, stop trading after a few months and take the rest of year off..

The same sort of thing between 2016 and 2019, then covid comes along and returns go through the roof for a couple of years.

Thank you for your response. Great insights.

I found instead of generating high Alpha, I ended up with high Beta and a mediocre Sharpe. Over many years that is actually not so bad.

 

[Lee-me]

Expand your knowledge further and of course always try out your strategies first on a demo account, and just manage your risk better. If you are really into the whole trading thing you should dedicate more time.

 

[Ethan.ishere]

Focus on education, and knowledge first. Once you get the theoretical hang of it, go about trying your strats on a demo and see if they work out. If they do start trading small till u get a practical taste of things and after a long while probably, you will be experienced enough to try some crazy stuff out. All of that if you are working alone.

 

[wxytrader]

I'm fairly sure it's the other way around, but maybe you mixed it up.

If you buy a call your risk is limited to the premium you paid while the profit is theoretically unlimited.

So, risk can be precisely determined while reward can only be estimated.

If you trade outright in a liquid market using hard stops it's essentially the same.

Sound advice to become part of 98% of traders who never make any money.

Trading is like everything else...as I believe BNF said it became muscle memory. No amount of strategies or analysis, systems, journaling or backtesting are going to help until you know what to look for, and you can only know what to look for by looking at miles and miles of charts. It would be like buying a bunch of books on how to play golf, and then expecting to hit a hole in one every hole...which I think is the expectation of most retail when they start out.

I recall I had a guy doing some tile work and we got to talking. He was big into forex and was touting how he had some trade signals he always waited for confirmation. I took a look at the chart and in a couple seconds said "oh yeah, well I'd be a buyer here", and his response was "you can't just buy without getting your signal confirmation." Anyway the next day price popped bigly. The moral of the story is don't take trading advice from my tile guy! jk he did great work and for all I know is making money in forex. The point is I didn't need to get any signal confirmation...I could just see from the chart.

 

[murray t turtle]

[ Most of his QUOTE="Laissez Faire, post: 5910909, member: 206390"]I'm fairly sure it's the other way around, but maybe you mixed it up.

So, risk can be precisely determined while reward can only be estimated.

If you trade outright in a liquid market using hard stops it's essentially the same.[/QUOTE]
%%
Sounds right , but depends a lot on which market. And looks like you are aware of that.
MOST leveraged markets , its so easy to lose big or big % ,have to do risk control to the max.
MOST businesses , risk control to the max is not a good business plan @ all;
good customer service, rewards , plans are much more important..............
Lots of things can help, +for many, your post #4;
+Dave Ramsey said don't buy a new car unless you a are millionaire. LOL
NOR is he saying you have to buy a new auto.

 

[wxytrader]

Any trader with a Sharpe ratio less than 2.0 will have lumpy returns. Will not be profitable every year.

You need a Sharpe ratio of around 2.5 to be profitable almost every year, ideally 3.0. Maybe some elite discretionary day traders can maintain that for decades. But i will admit not having a sharpe ratio as high as that over the long run.

The only hedge fund in the world that can do that at scale is Rentec Medallion.

The closer your sharpe ratio is to 0.0 vs 3.0, the more random your returns will look like.

There is also the issue of fat tails, you can be happy grinding between -20% to 100% a year say between 2003 and 2007, then 2008 comes along and you make 1000%, would still describe those returns as lumpy? What are you supposed to do in 2008, stop trading after a few months and take the rest of year off..

The same sort of thing between 2016 and 2019, then covid comes along and returns go through the roof for a couple of years.

I created something similar...my spreadsheet shows the return on capital that is at risk which is essentially the same thing as the Sharpe ratio but more dynamic. Where the Sharpe ratio will tell you how much capital you are expending for a return on an investment compared to other investments while normalizing volatility... mine calculates how much risk you are taking for that return on capital.

IMO it's more important to know the return on risk than the return on capital.

Do I get a Nobel peace prize???