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slippage, spreads and/or commision effect on profits

  • #1
  • First Post: Dec 7, 2009 5:05am Dec 7, 2009 5:05am
I am currently setting my trading goals and expectation for my new (and first) account.

A lot of threads and articles state that a ROI of 20% a year is very good. and that 5 or 10% is more likely.

I was wondering what kind of trades the most people do for a certain ROI, for example :

20% ROI, 15 trades with an average profit of 30 pips, and an average trade size of 100 pips

in seems like the spreads and other costs are a major major cut on profits. So i was wondering what kind of sizes and experiences you have on this forum.

Thanks in advance !
  • #2
  • Dec 7, 2009 3:43pm Dec 7, 2009 3:43pm
1. ROI is dependent on the individual. For some people, ROI of 20% is considered low while for some 20% is considered high.
I personally believe that 20% ROI Annually is very low for forex if you're leveraging it.

eg. I already hit 15% ROI in 2 days. Of course I heavily attribute luck to it, but it goes to show that 20% isn't the skies. (I didn't overleverage or did something stupid)

2. Don't think about how much $ you can make when you start off or whats the best timeframe, system, etc. Think about who you are, what you can handle, and with that make your own system. Not doing that is what kills 95% of new traders and it killed me 3 grand when I started off.

I beg you not to go to the trading system forum here. It will only make you go round 'n round in circles always trying to find latest *HOT* 5 Star system that shows imgs of working 100% of the time, but doesn't show its failures.

3. Your last question was a bit confusing, but here.
Yes, spreads are money eaters, but the amount of money you make if your successful makes the spreads look like pennies.

4. My personal suggestions are that if you never traded on a demo or traded on the demo but didn't take it seriously, then don't trade with real money. Take the demo seriously and test test test and have at least 3 successful months and then play with real money.

Good Luck and Don't Screw up like I did
  • #3
  • Dec 7, 2009 4:42pm Dec 7, 2009 4:42pm
Quoting jykong
1. ROI is dependent on the individual. For some people, ROI of 20% is considered low while for some 20% is considered high.
I personally believe that 20% ROI Annually is very low for forex if you're leveraging it.
Thats exactly what i think, but the professional funds seems to be good if the hit 20%, for example the LTCM had a max return of about 40% one year and was praised alot.

Quoting jykong
eg. I already hit 15% ROI in 2 days. Of course I heavily attribute luck to it, but it goes to show that 20% isn't the skies. (I didn't overleverage or did something stupid)


Quoting jykong
2. Don't think about how much $ you can make when you start off or whats the best timeframe, system, etc. Think about who you are, what you can handle, and with that make your own system. Not doing that is what kills 95% of new traders and it killed me 3 grand when I started off.
I do not think alot about what i can handle because i am building my own trading system (programming) . so i am planning to deposit an amount and let the system do its job (no emotions etc).

Quoting jykong
I beg you not to go to the trading system forum here. It will only make you go round 'n round in circles always trying to find latest *HOT* 5 Star system that shows imgs of working 100% of the time, but doesn't show its failures.
Thanks for the advice, i do understand this, before i go live (in demo) with the system i want to make sure i understand it and it is backtested a lot, not only profits or pips but also equity curve analyses, sharpe ratio, max drawdown etc etc. I do not seek fast profits alone, i see this as a perfect math/programming project that can be profitable.

Quoting jykong
3. Your last question was a bit confusing, but here.
Yes, spreads are money eaters, but the amount of money you make if your successful makes the spreads look like pennies.
Currently i have designed a system for the GBPJPY pair, on average it has a profit of around 8 pips per trade. i am thinking of scaling to a bigger timeframe or longer history (like moving average). this will increase the average profit but generates fewer trades per period and therefore has larger swings.

If i will implement the 8 pip system i figured i will be paying 3 to 5 pips per trade , and a little bit slippage, that means that 50% of my profits are 'gone'. however it is still more profitable than increasing the history etc because of the fewer frames.

I still dont know what other people have like average trade size etc. if the result is 20 or 40% profit it seems that they need a lot of trades or a few big trades.

Quoting jykong
4. My personal suggestions are that if you never traded on a demo or traded on the demo but didn't take it seriously, then don't trade with real money. Take the demo seriously and test test test and have at least 3 successful months and then play with real money.
Thanks a lot for your advice and time, really appriciate it . Cheers
  • #4
  • Dec 7, 2009 5:48pm Dec 7, 2009 5:48pm
Quote
Thats exactly what i think, but the professional funds seems to be good if the hit 20%, for example the LTCM had a max return of about 40% one year and was praised alot.

Well, they're different story. Remember that they're huge funds that ranges from million-billion and good chance that they're not leveraging and at the same time playing with other markets.

Quote
I do not think alot about what i can handle because i am building my own trading system (programming) . so i am planning to deposit an amount and let the system do its job (no emotions etc).

No offense or anything, but I don't believe in EA's. If they did then everybody would be a millionaire by now.
Only way a EA would work is if you're monitoring certain market conditions.
I played with countless amounts of EA's and they all fail eventually or barely shout out $$ worth mentioning.

By no means am I discouraging you, but utilizing math alone, makes the trades look more like a gamble.

I don't know what to say, but Good Luck. If its your cup of tea and test it and works out, then thats great for you.

DR. S. SIVARAMAN from fxstreet seems to be into something that you're doing. He bases all of his trades on his algorithm that he made.
  • #5
  • Dec 8, 2009 12:17am Dec 8, 2009 12:17am
Quoting kaas
Thats exactly what i think, but the professional funds seems to be good if the hit 20%, for example the LTCM had a max return of about 40% one year and was praised alot.
The answer is, LTCM was judged on an entire-portfolio basis and on a risk-adjusted basis. Until their blow-up, LTCM had very consistent returns with very small, if any, drawdowns. They were also trading billions. FYI, LTCM was also leveraging big time - so they were making their money off micro-spreads and leveraging off the consistency of those spreads.

There are people here posting that they made XXX bps in one or two days. If they could do that consistently for an entire portfolio with controlled drawdowns for a long period of time, they wouldn't be posting here - some HF or IB would've grabbed him and pumped money into his strategy.

With leverage or non-linearity (like options), it's easy to make a lot of money in a short period of time. So I think part of the problem is, we are comparing apples to oranges - the reporting of gains/losses is not on a equal basis on many levels.
  • #6
  • Dec 8, 2009 2:14am Dec 8, 2009 2:14am
Quoting kaas
I am currently setting my trading goals and expectation for my new (and first) account.

A lot of threads and articles state that a ROI of 20% a year is very good. and that 5 or 10% is more likely.

I was wondering what kind of trades the most people do for a certain ROI, for example :

20% ROI, 15 trades with an average profit of 30 pips, and an average trade size of 100 pips

in seems like the spreads and other costs are a major major cut on profits. So i was wondering what kind of sizes and experiences you have on this forum.

Thanks in...
20% ROI is a fantastic return. The reason why so many here there and everywhere think it isnt is because they have minimal capital and believe all the hype about making millions out of cents.

IF you where trading with a million dollars then a 20% return to the individual would be more than sufficient. To the traders with only 1 or 2K then the returns are 'insufficient'.

I believe that we are adapted as humans to seek a relative return for efforts. It has been ingrained in us from childhood with the lines "the harder you work the more you make" and so on. So if you spend hours every day trading, week in week out then the expectation for return is higher, regardless in most minds on the starting capital. Combine this with the fallacy that is advertised about trading and turning your small account into wealth with 'ease' and I must stress the EASE part (because that is what is out there for you niave minds to believe) and you have a recipe for high return expectation with little or no capital and effort.

Trading that small account and doubling it will make you stand up and say BLAH to the 20% because you as an individual got lucky and managed to double that account. Congrates to you, you now have 2K from 1K. You double it again and well done you have defied the odds and now doubled it again. DO you think your a trader now. You have taken you low account of 1K and turned it to 4K through, more often than not, high leveraged, high risk trading and you have gotten away with it. There is usually a level you get to before 1 of 2 things happen.

1) you get the message, your lucky and you now adapt a more sensible approach to trading. While you dont get your spectacular gains you get gains over a longer period
2) your ego gets the better of you, your luck runs out and in the process of risky, leveraged trades you hit that small bump in the road that causes capital meltdown. You no longer post on these forums because you cannot face the music that you were not a trader and you can no longer boast your gains.

Usually the ones that post such gains head down the 2nd path.

A couple of tips- 20% ROI are great and on small accounts they should reflect more than just the profit figure over the course of an entire year. Great gains should be taken with a grain of salt and used in reflection of your plan. You had a great year but dont have expectations that it will happen again the next year.

Considering most views of inflated ROI stop to think of the opposite side. What are your views on a 20% drawdown?

Unless you are trading an amount that actually has some bearing on your emotions then you are more than likely to gamble, that is trade with a riskier approach. The amount where you start to trade with more respect for your capital is different for everyone, however if you reach (point 2) 20% drawdown and you dont feel the pinch a little then chances are that it is not enough.


I am a fan of seeing great gains, and I have witnessed times where they have happened, to myself and others however they need to be seen as what they are and then moved on from. Posting them and then getting a 'rise' out of the responses tends to lead you into the expectancy of getting them over and over again which will usually land you in the capital meltdown catorgory, but I guess most wont hear of it because those people tend to disappear or find new alias'.

20% per year is a great return. It is usually a benchmark for big time players and should be seen as a great thing from a trading POV.

Razor
  • #7
  • Edited 2:57am Dec 9, 2009 2:32am | Edited 2:57am
Quoting Razor_trader
Considering most views of inflated ROI stop to think of the opposite side. What are your views on a 20% drawdown?
A 20% drawdown is way too big!!! I would shut down my ATS and re-evaluate if I have greater than a 10% drawdown.

Greater than 5% drawdown on a portfolio already makes me nervous, especially in an asset class like currencies, which has much lower volatility than stocks or most futures.

I think you make a good point - there is too much emphasis on gains (what beginners think about) and not enough on loss (what institutions think about). Also, I think as your AUM gets larger, you become more risk averse; if I were only speculating with $1,000 (way too little, by magnitudes), I would think less about a 20% drawdown.

If you are not convinced, consider this table (if you are trading as a % of AUM or constant leverage, NOT fixed number of contracts):

Drawdown GainNeeded
-5% 5.3%
-10% 11.1%
-15% 17.6%
-20% 25.0%
-25% 33.3%
-30% 42.9%
-35% 53.8%
-40% 66.7%
-45% 81.8%
-50% 100.0%

If you have a 10% drawdown, you need a 11.1% return to bring you back to your high water point. If you have a 20% drawdown, you need a 25% gain. If you lose half your portfolio, you need a 100% gain on the 50% that you have left to get back.

This brings up a really interesting point - if you are using % sizing and you have an equal chance of making 20% and losing 20% (no edge), over time, you will lose almost all of your money.

You will not lose all of it, because with % sizing, you will risk less money as you lose more, but nonetheless, with no edge, you do not end up with the same amount started, you end up essentially broke in the long run.

Why does this happen? Intuitively, when you lose 20%, you have less capital to play with than before, so even if you make 20%, it's not enough help you break even.

Try it out in a spreadsheet if you like - it only takes a few minutes to do.

Mathematically, over the long run, in easy terms (not mathematically rigorous, but easier to understand without symbols),

NAV_no_edge = 1.20 * 0.80 * 1.20 * 0.80 * ... = 0.0 (20% gain, 20% loss, equal chance)
NAV_small_edge = 1.25 * 0.75 * 1.25 * 0.75 * ... = 1.0 (25% gain, 20% loss, equal chance - breaks even)

Yes, this is the flip-side to the "magic of compounding".
  • #8
  • Dec 9, 2009 3:18am Dec 9, 2009 3:18am
Quoting kfmfe04

This brings up a really interesting point - if you are using % sizing and you have an equal chance of making 20% and losing 20% (no edge), over time, you will lose almost all of your money.
This is only true if you dont diversify, for example if i trade simeltaniously 3 currenypairs and 2 have a profit of 10% and one a drawdown of 20% i am still even.

Dispite that i agree to that a 20% drawdown is tomuch.
  • #9
  • Dec 9, 2009 4:26am Dec 9, 2009 4:26am
Quoting kaas
This is only true if you dont diversify, for example if i trade simeltaniously 3 currenypairs and 2 have a profit of 10% and one a drawdown of 20% i am still even.

Dispite that i agree to that a 20% drawdown is tomuch.
Let me clarify. In my example, I am talking about portfolio-level returns over time. Given this framework, your example would, indeed, result in one datapoint of 0%.

The idea of diversification is also extremely important - it's the only "free lunch" that is available out there, but that's a whole different story.

In contrast to your example, if you had 10% returns for two days and a -20% return in one day. Your final return would be:

0.968 = (1.10 * 1.10 * 0.80) - 1.0

or a drawdown of 3.2% below your initial capital, which illustrates my point, nicely. Note that the ordering of which return comes first does not matter if you are using % scaling. To survive for the long-run, you should carefully consider whether you are using % scaling (what hedge funds do) or fixed-dollar-risk investment (what investment banks do). It's the difference between geometric and arithmetic returns, and has a great impact on your portfolio over time.
  • #10
  • Dec 9, 2009 6:11am Dec 9, 2009 6:11am
Great explanation ! a 20% return on a portfolia is way to much in my opinion !

I would myself not allow a drawdown per month of about 5% and that will be a lot !
  • #11
  • Last Post: Dec 9, 2009 6:35am Dec 9, 2009 6:35am
Back to your specific case:

Quoting kaas
Currently i have designed a system for the GBPJPY pair, on average it has a profit of around 8 pips per trade. i am thinking of scaling to a bigger timeframe or longer history (like moving average). this will increase the average profit but generates fewer trades per period and therefore has larger swings.

If i will implement the 8 pip system i figured i will be paying 3 to 5 pips per trade , and a little bit slippage, that means that 50% of my profits are 'gone'. however it is still more profitable than increasing the history etc because of the...
A few questions:
1. Is 8 pips after trading costs? (after slippage and commissions)
2. How do the 8 pips split out between winners and losers (sizes and percentages)? I personally don't use this metric but many people do...
3. How long is your testing period?
4. Are you comfortable with your risk profile (expected losses)?

Ultimately, you have to be comfortable with 4. in the context of your trading costs, or you will not stick with the plan.

I recommend that you read over the FF forums carefully. There's a lot of garbage, but there are a few excellent threads which will help you to think about risk/reward in a quantitative manner.

But your observation is generally correct - if you are trend following, you either stay on the sidelines most of the time and try to catch the big fish (but you must ride the open pnl) or you try to catch the nooks and crannies, pay the commission/slippage, and get a smoother equity curve, but may miss out on the larger moves.
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