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Why professionals "only" make ~30% anually

  • #81
  • Jan 30, 2007 10:22pm Jan 30, 2007 10:22pm
BoJ have changed their intervention policy just recently. In 1995, when USD/JPY hit the historical bottom at around 79.80 the interventions below 100 (on the way down and then on the way up) were quite frequent. Even concerted ones (joint), when a number of CBs got involved. BoJ used to work as any other speculator and so far they seem to come up with some profits every time they get involved. The contracts that BoJ bought through interventions at below 100 in 1995 they sold back in 1997 starting from around 127.00. Then a new wave of interventions (this time against the USD and in order to support the yen) began in 1998 from 134 and (being relatively unsuccessful in the beginning) continued all the way to the very top at 145. The profits made on those interventions were eventually pocketed at 110-120 trading zone by the end of the same year. That time the "intervention" daily ranges usually were in excess of 250-300 pips. Also that time BoJ didn't care much about damaging the liquidity and sometimes made repetitive attempts to intervene several times a day. The biggest intervention related one day trading range was posted on USD/JPY chart at 10.07.98 reaching over 1100 pips. It was also the time when LTCM hedge fund got burned. Obviously that huge move should partially be attributed to them liquidating USD/JPY longs in response to numerous margin calls they got that day.
  • #82
  • Jan 30, 2007 10:49pm Jan 30, 2007 10:49pm
Quoting zeroz
For a supposed trillion+ dollar market I wouldn't think 4-7 billion would by itself move the market many multiples more than its daily range?
Divide $1tril by 28 pairs. ~ $35b

Divide that figure by the daily range of each pair. (say 50 pips) $715m

Divide that by 2 for the buy and the sell side. $357m

Thats what you would find on average at each pip before price would move.

It also fails to account for time. Much of that comes online over a 24 hour period so at any given moment its far less.

Its a very simplified model, but you get the idea. When you factor for the concentration of liquidity, it should be easy to see how an order placed at an inopportune time could spike the market quite a bit.
  • #83
  • Jan 30, 2007 10:56pm Jan 30, 2007 10:56pm
Quoting zeroz
How is it that you're able to see how much people are buying and what orders are being worked in?

What do you think the most you could move in and out under most market circumstances would be, maybe having an effect of 1-3 pips?
1) Any forex news service will share this info as it becomes available. It's quite frequent and reliable. Sometimes you can see it happen in the open interest on an institutional platform. You don't know who or why there doing it, but you can see the book get consumed.

2) It depends on the pair, the time, and the price at which the order hits. As a rought questimate I would say durring london or NY, on the majors, you can get into a $25-75m position without attracting too much notice...
  • #84
  • Jan 31, 2007 12:41am Jan 31, 2007 12:41am
Glad to see I invoked some very good and well thought out responses
  • #85
  • Jan 31, 2007 2:29am Jan 31, 2007 2:29am
Indeed, ScottH, an illuminating thread. Thanks to all the contributors!

What I, basically, learn from what has been said here is that smaller traders can tolerate more risk. More risk - more gain. However - too much risk - no good, you are killed or, at least, wounded. As someone suggested here, RM and MM rule.

Here is the question that bothers me for a long time. I've read for thousand times at FF that you shall not risk more than 1-2% of your free capital on a single trade, and if you do, very bad things will happen to you. On the other hand, there is the Kelly formula. If you apply it to any decent strategy (wins slightly greater than losses, slightly more wins than losses), you see that the optimum would be to risk about 25% of your capital. Ok, that's too much, but backtesting many strategies, I saw that risking 15% can be safe in most cases (again, when a strategy is decent).

So, what is the proper MM approach for a small trader - 1% or 15% risk?
sans peur et sans reproche
  • #86
  • Edited 3:01am Jan 31, 2007 2:54am | Edited 3:01am
Quoting ilanr
Indeed, ScottH, an illuminating thread. Thanks to all the contributors!

What I, basically, learn from what has been said here is that smaller traders can tolerate more risk. More risk - more gain. However - too much risk - no good, you are killed or, at least, wounded. As someone suggested here, RM and MM rule.

Here is the question that bothers me for a long time. I've read for thousand times at FF that you shall not risk more than 1-2% of your free capital on a single trade, and if you do, very bad things will happen to you. On the other hand, there is the Kelly formula. If you apply it to any decent strategy (wins slightly greater than losses, slightly more wins than losses), you see that the optimum would be to risk about 25% of your capital. Ok, that's too much, but backtesting many strategies, I saw that risking 15% can be safe in most cases (again, when a strategy is decent).

So, what is the proper MM approach for a small trader - 1% or 15% risk?
For me, I only risk max 2% of my capital in each trade.
Works good so far. Perhaps you misunderstood Kelly formula ? I found this.

The Kelly Formula is critical for traders wanting optimal rates of return. For practical application of the Kelly Formula, use 80% of the Kelly %. In the above example – we derived an optimum risk size of 40% of capital. This is too high for practical use. Instead, we would use 80% of 25% which is equal to 20%. Determine how many trades you are likely to have on at one time and then divide your 80%-Kelly value by that number of trades. For example, if you are likely to have as many as 8 trades at one time, then your optimal trading size, using the above example, would be [20%/8] or about 2.5% of your trading equity.
  • #87
  • Jan 31, 2007 4:03am Jan 31, 2007 4:03am
Quoting luqmanz
For me, I only risk max 2% of my capital in each trade.
Works good so far. Perhaps you misunderstood Kelly formula ? I found this.

The Kelly Formula is critical for traders wanting optimal rates of return. For practical application of the Kelly Formula, use 80% of the Kelly %. In the above example – we derived an optimum risk size of 40% of capital. This is too high for practical use. Instead, we would use 80% of 25% which is equal to 20%. Determine how many trades you are likely to have on at one time and then divide your 80%-Kelly value by that number of trades. For example, if you are likely to have as many as 8 trades at one time, then your optimal trading size, using the above example, would be [20%/8] or about 2.5% of your trading equity.
Music for my ears. I'm glad someone uses Kelly. I risk 15% of capital (or 1/2 Kelly's percent, whichever is lower) for my first trade. Should I open a second position, I use 15% of the capital that I would have if I'd lose all the money I'm risking in the first trade, etc. As I usually don't have more than 2-4 trades at once, this works fine for me.

It's clear that if you run a $100M fund AND trade like myself (15% risk, 1:200 leverage), every move you make shakes the market and every loss kills 15% of your investors (heart attacks, strokes, etc.)...
sans peur et sans reproche
  • #88
  • Jan 31, 2007 4:33am Jan 31, 2007 4:33am
  •  Trader#0000
  • | Status: Unregistered Trader
Quoting Darkstar
I've watched billion dollar orders hit the market and the effect they have on prices. The forex market isn't anywhere near as big as it seems.
Your right Darkstar, I have sat in a bank's dealing room on a quiet day during the Asian session and saw a series of about five-or-six spot deals of around a couple of million move the market!
  • #89
  • Jan 31, 2007 4:51am Jan 31, 2007 4:51am
Thank you, luqmanz, for the insight about Kelly formula, as after using the random portfolio simulator ( http://www.financialpicks.com/simulator.html ) the number it gave me seemed to be a very high number indeed (60%).
  • #90
  • Jan 31, 2007 6:21am Jan 31, 2007 6:21am
Quoting Darkstar
When you know what your doing you can do it in 3 months without taking on excessive risk...
Or even in a month in certain conditions risking 4 one trade 1% of your capital and limiting overall risk to 10% of account.
Quidquid latine dictum sit altum viditur
  • #91
  • Jan 31, 2007 7:48am Jan 31, 2007 7:48am
Quoting CHECKstar
Your right Darkstar, I have sat in a bank's dealing room on a quiet day during the Asian session and saw a series of about five-or-six spot deals of around a couple of million move the market!
I actually moved prices myself once. I put a $2m limit order on between the spread durring the asian session and moved Oanda's price by 1 pip. I pulled it out because it was taking too long to execute and oanda instantly dropped back a pip. I was so amazed that it happened I did it 3 more times before it finally executed and I lost the trade, but it was a cool feeling to be sure.

Not quite the same thing as a bank dealing desk trade I'm sure, but it highlights that it doesn't take much to affect prices.
  • #92
  • Jan 31, 2007 9:27am Jan 31, 2007 9:27am
Darkstar,

you say that youve been in a dealing room and seen several yards dropped on the market.

Are you talking about euro here?

reason I ask is that ive been looking for someone to handle orders of half a yard into the cable market at a single price without having to work the order - ive spoken to frontline banks and i cannot find anyone who is willing to handle this.

Yet you speak as if these frontline banks are placing yards into the market all the time in single lumps - can you elaborate for me please?
https://linktr.ee/Soultrader
  • #93
  • Jan 31, 2007 12:09pm Jan 31, 2007 12:09pm
Quoting soultrader
I've been looking for someone to handle orders of half a yard into the cable market at a single price without having to work the order - ive spoken to frontline banks and i cannot find anyone who is willing to handle this.
Shouldn't be a problem at all. Try Standard Chartered, RBC or RBS.
  • #94
  • Jan 31, 2007 11:31pm Jan 31, 2007 11:31pm
Quoting Darkstar
I actually moved prices myself once. I put a $2m limit order on between the spread durring the asian session and moved Oanda's price by 1 pip. I pulled it out because it was taking too long to execute and oanda instantly dropped back a pip. I was so amazed that it happened I did it 3 more times before it finally executed and I lost the trade, but it was a cool feeling to be sure.

Not quite the same thing as a bank dealing desk trade I'm sure, but it highlights that it doesn't take much to affect prices.
Oanda can handle such a big order ?
  • #95
  • Jan 31, 2007 11:54pm Jan 31, 2007 11:54pm
Quoting soultrader
Darkstar,

you say that youve been in a dealing room and seen several yards dropped on the market.

Are you talking about euro here?

reason I ask is that ive been looking for someone to handle orders of half a yard into the cable market at a single price without having to work the order - ive spoken to frontline banks and i cannot find anyone who is willing to handle this.

Yet you speak as if these frontline banks are placing yards into the market all the time in single lumps - can you elaborate for me please?
Sorry, I didn't mean to imply I was ever in a dealing room. I trade on an institutional platform from home, so I can see real pricing. And all my reference points are in USD unless otherwise specified.

Several of the events I referenced were congregations of stops being executed. The GBP/JPY trade didn't reference who was actually managing the order, but I imagine it was a bank. One event was a hedgefund that blew up and was liquidiating in a hurry (which I only found out about after the fact) and the rest I have no idea who was executing them. Could have been banks, but I wasn't on the other side to know.

As a side note, currenex has a function which allows you to specify any amount of currency you want to transact and RFQ it to all the banks in your peer group. They will all quote back and you have like 45 seconds to accept one or decline them all. The larger the order the more your going to pay in the spread, but you can get it done if you just want to get it done.

If your trying to find someone to counterparty a half yard at a 2 pip spread without moving the price, I wish you luck.
  • #96
  • Jan 31, 2007 11:59pm Jan 31, 2007 11:59pm
Quoting luqmanz
Oanda can handle such a big order ?
In theory, but I would never try it.
  • #97
  • Feb 1, 2007 12:33am Feb 1, 2007 12:33am
Quote
reason I ask is that ive been looking for someone to handle orders of half a yard into the cable market at a single price without having to work the order - ive spoken to frontline banks and i cannot find anyone who is willing to handle this


Are you expecting to deal at the current market rate?.

If so, I can understand why they wouldnt want to give you a single price. The market risk is not worth it.
You cant fill anywhere near that size on the electronic platforms - EBS, Reuters 3000 . Not only because of relative lack of overall depth,liquidity in the GBP , but also because even if there was that much in the overall market, it would have to be available to that particular Bank - Its no use Bank X bidding for 500mio if Bank Y cant deal with him, due to credit limits, country exposure limits etc.

So.. The bank you sell to at your single/guaranteed/market price is now long of 500mio at the current market level with all the risk. He cant close it in 1 hit on the electronic platforms, so he either does it in smaller lots and hope(not ideal with a half yard position) the market doesnt move against him in the interim , or tries to get a "direct call' to another bank to make a price in that size. - not always possible


The Bank is far more likely to take your order at a certain no. of pips away from the market giving them a safety cushion(guaranteed profit ), so they can then give you a single price.
Would you be willing to sell at 25...50...75...whatever no. of pips below the current market level to get a single price in 500mio?

In Banking larger size doesnt always mean a better price!
  • #98
  • Feb 1, 2007 4:22am Feb 1, 2007 4:22am
hello all,

I'm under the impression that in forex market, the big fish (hedge funds) and small fish (retail trader like most of us) don't eat the same food. Small fish can harvest the pips from small breakouts (20-30 pips during market open for example) when hedge funds cant do that since their money will move the market and as a result, they can't profit. In other words, it's easier to profit as a small trader than as a big trader.

Am I right with this assumption ?
  • #99
  • Feb 1, 2007 4:53am Feb 1, 2007 4:53am
  •  Trader#0000
  • | Status: Unregistered Trader
Quoting soultrader
Darkstar,

you say that youve been in a dealing room and seen several yards dropped on the market.

Are you talking about euro here?

reason I ask is that ive been looking for someone to handle orders of half a yard into the cable market at a single price without having to work the order - ive spoken to frontline banks and i cannot find anyone who is willing to handle this.

Yet you speak as if these frontline banks are placing yards into the market all the time in single lumps - can you elaborate for me please?
I have never seen deals of more then 50 mio on any one trade in the spot market. Normally spot is 1 to 2 mio. The swaps market is where you see the big dollar value trades getting pumped through. A 2 yard audusd trade is nothing out of the norm.
  • #100
  • Feb 1, 2007 5:10am Feb 1, 2007 5:10am
Quoting Aroon
The funny thing is, I have read a lot about forex, the way to trade ("use a system") and the way to manage your money ("always use stop losses").

Nevertheless, I did think that I could do it my way. Although I tend to approach Forex seriously, I admit, that I am a bit of a gambler.
In a ranging market you do not need stop losses. That was proved here IMO. 81 consecutive profitable trades before a margin call and the account ending up at that point with a 30% profit in 1 month AFTER the positions were closed. If you have a view run with it if it is based on a combination of fundamentals AND technicals.

But always do it your way or you'll never learn. That does not mean you don't apply the knowledge you gain by trading every day and considering different ways of doing things. And eventually you find a trading style that suits you.
Do not focus on making money; focus on protecting what you have.
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