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Why professionals "only" make ~30% anually

  • #21
  • Jan 24, 2006 11:16am Jan 24, 2006 11:16am
Hi, I'm new to this forum, but I have been reading through a lot of posts. In regards to this topic, I think the percentage is all relative to what you're basing it off of. If you're basing it off the actual money in your account, and you don't have a huge trading account, then of course your percentages are going to be higher. But that's because you're using leverage. I think that people who have $10,000,000+ trading accounts are either not using as high of leverage or not using any at all. 1 lot in a forex trade is worth $100,000. If you were to base your percentage off of the actual amount that you traded (meaning the value of each lot), I bet you would find the percentages you are earning to be much less.
A small example: Let's say you had $10,000 in your account, and you had a good trading strategy and turned that into $40,000 in one year using 1 lot per trade. You could say that you've made 300% profit basing it off of the original $10,000. However if you base it off of $100,000, the size of 1 lot (what you were using on every trade), well now you've only made a 30% profit for the year. And if you were to base it off of the total amount traded, let's say you opened 100 trades throughout the whole year meaning you traded a total of $10,000,000($100,000 x 100). Based off of that, you only made 0.3% profit for the whole year.
I think that professionals and fund managers who have trading accounts with $10,000,000+ are basing their returns on either the average number of open lots per trade for the year, or off of the total amount traded. Those are my thoughts on the subject.
Making my living one pip at a time.....
  • #22
  • Jan 24, 2006 6:27pm Jan 24, 2006 6:27pm
Quoting SterlingTDR
Yes, logically speaking 1% is 1% and nothing is different but on an emotional level its a different ball game. I'll give it to you that some people can dump $100k or 1% of a 10 million account without a problem but the vast majority do not have the psychological make-up for that kind of hit.

Steve
That is exactyl my point. You will never make $10 million until your psychology changes. There is a reason why they have that much money and you don't.

I used to work for a stock market education company and we did 1-on-1 coaching. We taught people to risk 2% in a trade. I remember 1 guy came in and said that he was risking $20,000 per trade. I thought he was an absolutely lunatic to risk so much in a trade. His trading float was $1,000,000 so he was risking 2% like we taught him and he was completely fine with it. It was at this point in time that I realised that it was a problem with me.

If you start with $10,000 and grow your account to $100,000 and then $1,000,000 then your psychology will grow with it and you will be able to trade these amounts without a problem. If your psychology doesn't grow with it, then you won't have those amounts to trade because you won't be able to make that much money.

Simon
  • #23
  • Jan 24, 2006 6:29pm Jan 24, 2006 6:29pm
Quoting cp_trader
Hi, I'm new to this forum, but I have been reading through a lot of posts. In regards to this topic, I think the percentage is all relative to what you're basing it off of. If you're basing it off the actual money in your account, and you don't have a huge trading account, then of course your percentages are going to be higher. But that's because you're using leverage. I think that people who have $10,000,000+ trading accounts are either not using as high of leverage or not using any at all. 1 lot in a forex trade is worth $100,000. If you were to base your percentage off of the actual amount that you traded (meaning the value of each lot), I bet you would find the percentages you are earning to be much less.
A small example: Let's say you had $10,000 in your account, and you had a good trading strategy and turned that into $40,000 in one year using 1 lot per trade. You could say that you've made 300% profit basing it off of the original $10,000. However if you base it off of $100,000, the size of 1 lot (what you were using on every trade), well now you've only made a 30% profit for the year. And if you were to base it off of the total amount traded, let's say you opened 100 trades throughout the whole year meaning you traded a total of $10,000,000($100,000 x 100). Based off of that, you only made 0.3% profit for the whole year.
I think that professionals and fund managers who have trading accounts with $10,000,000+ are basing their returns on either the average number of open lots per trade for the year, or off of the total amount traded. Those are my thoughts on the subject.
Fund managers calculate their return as a % of the capital they have under management. If you have $10,000,000 and you make $3,000,000 it is a 30% return. Doesn't matter how much leverage is used or what their turnover is.

Simon
  • #24
  • Jan 25, 2006 2:05am Jan 25, 2006 2:05am
Quoting DrRock
......I remember 1 guy came in and said that he was risking $20,000 per trade. I thought he was an absolutely lunatic to risk so much in a trade. His trading float was $1,000,000 so he was risking 2% like we taught him and he was completely fine with it. It was at this point in time that I realised that it was a problem with me.

If you start with $10,000 and grow your account to $100,000 and then $1,000,000 then your psychology will grow with it and you will be able to trade these amounts without a problem. If your psychology doesn't grow with it, then you won't have those amounts to trade because you won't be able to make that much money.

Simon
Simon, it looks like we agree. The issue then is how to overcome the barrier once it presents itself. Working toward the amount in question by gradually increasing the $ amount risked is one option but often this still does not work, because on an emotional level there remains internal conflict that has not been addressed. The fact is that, depending on the psychological make-up the individual in question, it may or may not be possible to resolve the matter.....ever.
This leaves really only a one solution which is to circumvent the issue by employing some sort of diversification.

Steve
I was here, here I was. Was I here? Yes I was!
  • #25
  • Jan 25, 2006 5:24am Jan 25, 2006 5:24am
How to overcome this problem? I don't know. It doesn't really seem to effect me. I went from trading $10k to trading $30k of someone elses money to $640k to $900k up to $1.8mill of other peoples money and it never really seemed to bother me. I tried not to focus too much on the $$ values. I would occasionally wake up in the morning and discover that the account balance had varied by $100k overnight (I trade daily). Sure it concerned me but not that much - I just kept my eye on the long term.

Simon
  • #26
  • Jan 25, 2006 7:11am Jan 25, 2006 7:11am
Quoting DrRock
How to overcome this problem? I don't know. It doesn't really seem to effect me. I went from trading $10k to trading $30k of someone elses money to $640k to $900k up to $1.8mill of other peoples money and it never really seemed to bother me. I tried not to focus too much on the $$ values. I would occasionally wake up in the morning and discover that the account balance had varied by $100k overnight (I trade daily). Sure it concerned me but not that much - I just kept my eye on the long term.

Simon
There is an interesting phenomenon which occurs to some, in that they find that their emotional and psychological make-up changes somewhat when they switch from trading their own account to managing others and vice versa. Did you find this?
I was here, here I was. Was I here? Yes I was!
  • #27
  • Jan 25, 2006 8:03am Jan 25, 2006 8:03am
Quoting SterlingTDR
There is an interesting phenomenon which occurs to some, in that they find that their emotional and psychological make-up changes somewhat when they switch from trading their own account to managing others and vice versa. Did you find this?
I absolutely found this. I am trading a 100% mechanical system and I found that I became far more disciplined when I started trading OPM because I knew that at some stage I may become accountable for the trades that I made. I always wanted to be sure that if I lost money it was because of the system and not because of a trading error. My objective is to reproduce the results of the system exactly so in 12 months I could backtest over the previous 12 months and the backtesting results will match precisely my trading results. This is where my focus is - trying to implement the system. This means that I am much less attached to the outcome.

Simon
  • #28
  • Jan 25, 2006 8:37am Jan 25, 2006 8:37am
Quoting DrRock
I absolutely found this. I am trading a 100% mechanical system and I found that I became far more disciplined when I started trading OPM because I knew that at some stage I may become accountable for the trades that I made. I always wanted to be sure that if I lost money it was because of the system and not because of a trading error. My objective is to reproduce the results of the system exactly so in 12 months I could backtest over the previous 12 months and the backtesting results will match precisely my trading results. This is where my focus is - trying to implement the system. This means that I am much less attached to the outcome.

Simon
Ok now lets say, just for arguments sake, that you stopped trading OPM and took a more discretionary approach with your personal account. Would you expect that your ability to cope psychologically would be better or worse?

Steve
I was here, here I was. Was I here? Yes I was!
  • #29
  • Jan 25, 2006 8:48am Jan 25, 2006 8:48am
I just wanted to say that I think this is one of the best posts I've seen on this forum.

I do believe that it is possible to achieve great things and my albeit relatively short track record shows this clearly. For me, the mindset is the key, and with that building over time, I have found my successes increasîng (now up to about 60% per month) and the stress levels reducing. I am learning that you have to look after yourself, trade with a clear, uncluttered and relaxed mind, using the simplest method you can find, and allow the trades to come to you.
The framework is there; we just have to work on our frame of mind.
  • #30
  • Jan 25, 2006 3:25pm Jan 25, 2006 3:25pm
Quoting DrRock
If you start with $10,000 and grow your account to $100,000 and then $1,000,000 then your psychology will grow with it and you will be able to trade these amounts without a problem.
Simon
Yes Simon, I fully agree.
I still remember my very first trades: when the rates moved, say, 10 pips against my position, I got scared and jumped out of it as soon as I could.
Several months later, I held positions, that represented 10k+ negative, and it couldn't bother me at all......
The more you trade, and the more your balance grows, the more you will move your limits.

I noticed it also works the other way round: the first weeks of my trading experience, I got excited over $250 profit as a result of one day trading. The more I traded, and the more my balance grew, I could earn $1,000 within a quarter of an hour, and consider this as absolutely normal, and nothing to get excited about.
  • #31
  • Jan 25, 2006 4:31pm Jan 25, 2006 4:31pm
Aroon,

Just wanted to take a second to thank you for responding to my question about your success and "failure" in trading as I had not had the chance to read the reply until a few minutes ago. I use the word "failure" in quotes b/c I am sure now this failure will lead to much greater success for you in the future. Thx again, you have helped a lot of people in just one reply.

Good luck to you, and don't forget those stops

thx,

drjoe
  • #32
  • Jan 25, 2006 5:41pm Jan 25, 2006 5:41pm
Quoting SterlingTDR
Ok now lets say, just for arguments sake, that you stopped trading OPM and took a more discretionary approach with your personal account. Would you expect that your ability to cope psychologically would be better or worse?

Steve
I am afraid that that would never happen because I make very poor decisions when I trade using discretion - it is not the way I trade - I believe that trading with discretion requires a skill that I don't have whereas trading a 100% mechanical system simply requires me to do what I am told.

Simon
  • #33
  • Jan 26, 2006 12:19am Jan 26, 2006 12:19am
Quoting DrRock
I am afraid that that would never happen because I make very poor decisions when I trade using discretion - it is not the way I trade - I believe that trading with discretion requires a skill that I don't have whereas trading a 100% mechanical system simply requires me to do what I am told.

Simon
I guess the reason I ask is that i've found that I've created a "comfort zone" with my trading approach and method and it seems to me that you've done much the same. It would appear that since you trade OPM and you use a system it's as if you've almost removed yourself and your "ego" from the equation. I suppose this allows you to detach your feelings to a large extent. Since you have faith in your system, fear, self doubt etc are not really significant factors anymore and because it's OPM you're able to maintain your objectivity due to the fact that winning and losing has a much smaller impact on you personally. Is that accurate?

Steve
I was here, here I was. Was I here? Yes I was!
  • #34
  • Jan 27, 2006 1:38am Jan 27, 2006 1:38am
Hi everyone

back to the discussion on trading with $10,000 vs trading with $10m, I once read that people with of a lot of something (beer, pizza, moeny, whatever) will value that in a decreasing way as they accumulate more of it. There is a 'utility curve' that plots at what 'exchange rate' people would swap one commodity (say beer) for another (say pizza) at different levels of beer and pizza. If you have 10 beers and no pizza you may well swap 3 beers for a pizza, whereas if you have 10 pizzas and no beer you would maybe swap 3 pizzas for a beer, and so on.

So I wonder if someone with a lot of money would calue that less than any of us without so much, and therefore care less than we would, and be more willing to lose £100k on a trade than I would be willing to lose $1000, even if this is the same %age of our net wealth.
  • #35
  • Jan 27, 2006 3:52am Jan 27, 2006 3:52am
What's the current pizza/beer exchange rate? Is it a trending market?http://www.forexfactory.com/forexfor...ons/icon10.gif
  • #36
  • Jan 27, 2006 4:13am Jan 27, 2006 4:13am
Quoting WTB
What's the current pizza/beer exchange rate? Is it a trending market?http://www.forexfactory.com/forexfor...ons/icon10.gif
No, this market is flat!
Because pizza and beer's prices rises together!
  • #37
  • Jan 27, 2006 4:24am Jan 27, 2006 4:24am
Quoting SterlingTDR
I guess the reason I ask is that i've found that I've created a "comfort zone" with my trading approach and method and it seems to me that you've done much the same. It would appear that since you trade OPM and you use a system it's as if you've almost removed yourself and your "ego" from the equation. I suppose this allows you to detach your feelings to a large extent. Since you have faith in your system, fear, self doubt etc are not really significant factors anymore and because it's OPM you're able to maintain your objectivity due to the fact that winning and losing has a much smaller impact on you personally. Is that accurate?

Steve
Steve,

Yes, I would say that that sums it up very well. Can't say I really thought about it like that though.

Simon
  • #38
  • Jan 27, 2006 7:43am Jan 27, 2006 7:43am
Quoting WTB
What's the current pizza/beer exchange rate? Is it a trending market?http://www.forexfactory.com/forexfor...ons/icon10.gif
i bid 3 beers for one pizza and i offer one pizza for 4 beers


that is = PIZ/BEE = 3-4

by the way they have to be nice beers - no cheap piss please
  • #39
  • Edited 10:57am Jan 27, 2006 10:56am | Edited 10:57am
Quoting DrRock
Steve,

Yes, I would say that that sums it up very well. Can't say I really thought about it like that though.

Simon
Simon, thankyou I really appreciate your input. You've got me considering a few options I have available which would allow me to work around a couple issues which have plagued me for ages.

Steve
I was here, here I was. Was I here? Yes I was!
  • #40
  • Jan 27, 2006 12:45pm Jan 27, 2006 12:45pm
To sum up then, everyone sems to be saying that you need to develop your mindset to grow with your trading, and apply a good technique consistently. Absolutely true. The key is to find your own power.

The only other thing I would add is that you shouldn't mentally limit yourself to what you think is achievable based on the experiences of others. I know plenty of people who are doing better than 30% per year, but they tend not to take part in this kind of discussion.
The framework is there; we just have to work on our frame of mind.
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