setting realistic targets

i would like to open a discussion regarding ROI targets in our trading.

as we all know this is a business and as a business growth, targets, risk management have to take priority.

Lately I have read threads regarding 20% a month 5% 100% a month being attainable. Some experienced traders, as well as i myself have found that pip:$ ratio is, whether we like it or not, a breaking point in our psychology.

leaving pride aside 10$ per pip, begins to cloud my mind .10$ is a breeze, 1$ is manageable however 10$/pip means that a 15, 20 pip stop loss (granted our timing is right, stops MUST NEVER correlate with psychological comfort or arbitrary % per account because it WILL BE HIT)

stop losses MUST always take our objective analysis, and volatility into account, you want to place a stop where it will not get hit, however if it does get hit the loss should be negligible, which means your analysis and your timing must be Right, and your reason to trade MUST be in your favor)

10$/pip means that a 20 pip stop will take 200.00 of your account, death by a thousand stops and you will be broke.......however i digress.

this post is intended for realistic target settings, and risk management.

with a $1,000 account we want to set a target of 5% per month and compound it....correct? with the same strategy same position size to account ratio, as to grow psychologically along with our account.
so by the first year our account would have grown by 88.56% (great return, and at this stage it is doable)

we need
1 to capture most of the monthly move at monthly ATR for the last 12 periods=1yr at 738 pips so that means that we need to catch
starting jan 6.78% all the way to dec 11.59% of the monthly Range the reason why dec is higher is because our gains will need to compound therefore to remain at 5% consistently we need $50 the first month but by dec we need $85 gain a month.

Sounds reasonable so far, however if we are managing our risk exposure and we will trade with the same relative risk, relative size, ratio viz a viz our account then we need to figure out position sizes and risk exposure.

how much % per trade should we risk to attain 5% monthly return?
and how much leverage should be used to do so?
so 1:1 leverage means that $0.10/ per pip needs 500 pips to make 5%
This fact indicates that you need to catch 67.8% of the monthly Range. how likely are you to do this consistently?
so we adjust our leverage to satisfy that at .20/pip 1:2 this means that you need 250 pips for 5% catching 33.9% of the monthly range (more reasonable, however your risk exposure increases)

2% of account risk per month allows you to lose 100pips at 0.20 however now you need 5.10% of that to reach 5% ROI target. This is still within realm of human capacity.

so now taking the same premise and using a 100k account
we just multiply our math (2decimals)

you need $20/ pip be able to arrive to 5% monthly ROI
can your psychology handle that?
that means that 2% draw down is now not $20 anymore it is $2,000

with a million dollar account you need $200/ pip then to achieve the same results and your draw down now at 2% would be $20,000

this leads me to believe that

1 you need to treat your 1000 account the same as a 1,000,000 as far as position size relative to account and risk relative to account, if you are able to grow this account all that would be needed maintain the relative size and parameters.

2 psychology does play a part when dealing with big numbers
and the 2% per trade is incredibly risky, i would say risk 2% per month.
as you want 5% a month grow.

and even this scale that i present here assumes you are a great traders that reaches your target consistently with no losing months.

so the only logical picture then is average your % gains yearly or the pressure will be too great.

psychology plays a great role when dealing with big numbers,
i can see myself growing a 1000 account more than 88% a year, but this would be detrimental as i hit bigger compounding hurdles i would hit a wall in my trading. 2% consistent returns a month means i need to risk a lot less than 2% per month.

so what is a realistic target for you?
realistic risk?
how much of a monthly move can you realistically capture?

You can never treat a small account like a large account it's impossible IMO.

Starting with 1k going for 5% a month will take a huge amount of time to build your account. I know some of the longer term trading shoot for this rate but if you trade intraday you can be targeting that a week. As the account grows you can reduce the risk per trade.

Fixed Ratio position sizing (vs fixed fractional position sizing) can address one of your fears as your account grows.

With Fixed Ratio, you would adjust your position sizing based upon accumulated profits (and some 'delta') and not the overall size of the account.

The ideas of what can be achieved have been "beaten to death" around the forums. I have seen very little REAL evidence of anyone doing 20% per month average for LONGER than 6 months consistently.

Keeping in mind, it is highly probable, that when someone finds something that really works well, a truly 'great edge', they will become more paranoid and secretive, protecting their possible "wealth machine". In this case, we would never see those extraordinary results.

Likewise, drawdown must be controlled. My tendency is to ignore ANY results with drawdown approaching 35% or higher AT ANY TIME.

Whatever you might achieve for yourself, I think it is generally believed that if your worst drawdown is 1/3 or less of your realized gains, then you are doing better than average.

in your huge post i did not find a very important aspect of trading. how much trades do you expect monthly?
if you have a sistem which manages to pay the spread , has 70%winrate, 1:1 win loss and 40 trades a month you can expect at 2% risk per trade a target of 32%.

do you care to elaborate?

i am basing myself on market capacity
monthly average range, to align position size, and risk threshold.

but i am interested on hearing your views, maybe i neglected to see that side of it.

so basically, risk and position size according to realized profits, a slower way to grow, but safer risk exposure.

sounds solid especially when dealing with larger accounts

I do it like this:

I have xxx USD, I split it in 2 portfolios:

1. X% of it, I fund my fx account
2. Y% of it, I invest it in another business I have (For example import-export of commodities)

-I will aim for a year.
-I check how the other business will do till that time (with a high percentage that the aimed profit will be reached) to get the X% back.
--->So by using Y% of my account I will have 100% (all my investment) back at the end of year so it is a risk free account (The X% that I will trade in forex market)

**Now based on the trading system I have in hand I choose a risk per trade percentage & a number of maximum trades per trading day
(I trade short term)

--> because the fx account is relatevively very smaller then my total investment I can easily handle the fluctuations in it.

An example:

-Total investment: 20K
-My guaranteed (high percentage that it is achievable) end year result in the other business: 30% ROI
-So I split my investment like this:

10% in my fx account
-Based on my trading system I start risking 3~5% per trade & as I gather some profit I increase it to 10% (I withdraw monthly)
90% in the other business
-After a year from now I will have: (20K * 90%) * 130% = 23.4K meaning that beside my original stake I have a 3.4K profit IF the worst scenario happens.
Anything more I can withdraw as profit from my fx account is a plus to the final profit!!!

Think about this plan & enjoy the result
Marry Christmas!

My experience is that you need to scale up the $ figure gradually. When I got my first client I went from my own $30k account to $200k account overnight. That fucked with my head for awhile. Based on a 1.5% risk I went from losing $450 per trade to $3,000. What was even worse was when I made my first winning trade for just over $10k. I immediately went into a slump after that and it took about 2 months to get my head straight.

More importantly than an individual trade is when you hit a persistent drawdown. I've hit a couple of long ones, including one really long one. It's funny, but you don't see much talk on these forums about this. Maybe I'm the only person here who has lost money for 9 months in row. When this happened I was pushing $600k. Granted I got down to .50% per trade after being beat up and the max drawdown wasn't very great, just into double digits as I spent months just breaking even. That fucked with my head.

So much talk focuses on the theoretical returns with very little talk about getting nailed big time, for whatever reason.

My main point here though is that if $ risked is scaled up in a reasonable fashion, then it shouldn't be that hard to deal with it. At this point 1% is 1%. But is sure is hard when you think about the dollars, and how the hell can we not think about the dollars?

exactly i do not have clients , but i was scouted by two hedge funds, US based, i had qualified their weed out period and once they said

OK we are clear to go 100K initial, i used my same strategy, first trade i took,i became stressed out and uneasy.

being down 500 dollars within seconds is not the same as being down 50, granted the trade was successful but it became a pattern.

after 3000 dollar draw down, i called them, apologized and told them i was not ready for this.

now i know that

1 i cannot be going to the office in the mornings
2 being on call and seeing patients in the hospital in the middle of the night
3 handling big sums of money.

once i was done with that i began trading my 10k account (which i have doubled since starting to trade over a year ago) from 5k

boom down 2000 in one night, i took the worse possible trades, just could not do anything right.

so that is when i decided to take a paid vacation to Vegas for a week and clear my head.

now i am back on track.

Yes everyone here in FF are super incredible traders, surely no one ever loses money here.

Once you begin doubting your decisions and start to have that fight or flight, and say OH GOD PLEASE, Turn back around..............SHIT, bite on your hands and watch the price continue to go against you.

means is time to get up, stop trading, clear your head and get out of that mode or else it is death.

How did you lose $2000 in one night if you don't mind me asking?

by trading like a dumb ass, over leveraging, revenge trading, i believe the word is ...................being stupid.

So would you agree the reason you lost that $2000 that night was because you had put yourself under pressure to achieve your 5% monthly profit target or whatever that may have been?

I had this, possibly still have it a little but I'd say I'm mostly over it and can trade normal amounts again after going back to demo/micro lots for a while, I just could not let my S/L get taken out, I had to close every trade at -5 pips or so and then watch it turn around and go hit my T/P.

If I didn't do something about it I was probably going to be stuck on micro lots for my whole life, so I emptied my account except for 500 dollars and just forced myself to take losses repeatedly until it didn't really bother me so much anymore.

I'm still not 100% but I feel a lot better about it now and can at least leave my S/L to get hit.

i think it was mostly psychological, after i got that opportunity with the Hedge Fund, and it completely screw my psychology.

i had been achieving my targets, stress, pressure, call it what you want. However at the end of the day, i learned a valuable lesson.

especially in the money management department, Averaging down, is a bad practice, you can blame the ego later, or the mentality.

i began running random chart generators and working on money management techniques, after my vacation things turned for the better but the lesson is well taken.

i Work a lot, especially back then, right now i gave up my regular patients, i mostly work on call, which entails starting from 5pm to 9am, mostly solve issues through the phone but i do get called out to Hospitals and such.

i decided to take Trading more like a business, and more in a professional manner, and with that knowledge of risk assessment, position sizing, risk managing is required. Hence i opened this thread.

recently another firmed wanted me to do Demo thorough their terminal and wanted me to participate in the weed out process but i believe i am not ready at this time.

Taking losses is not the end of the world, and that experiment of numbing yourself from the feeling as to become blaze I must say is very intelligent.

as i was talking to Chicky, The EDGE INCLUDES the money management, no edge can be attained without it.

as for Dopey i came to the same conclusion, if i am going to trade big accounts i need to start in increments, and treat my small account as a big account. I want to discuss the Real side of trading, once you are proficient at Analyzing the Market.

you should find out how many trades your tehnique generates. if you wait for closed candles then you can easily backtest your ideas either systematic or discretionary. in general the smaller timeframe the more trades you will have.

That's a great point. Over the years I've taken lots of breaks, mainly because I had to clear my head. Again, all these theoretical posts are based on week after week, month after month of non-stop trading.

I know institutional traders have to do that or they lose their job. But one of the advantages of trading your own accounts, or being the boss of your own fund, is you don't have to trade all the time.

Full-time trading will burn you out if you don't step away from it on occasion.

I know about revenge trading, I got burned in my first year doing that. I lost 3 months of profits and 25% of my capital in one 4-5 hour session. I took two months off after that and have never done it again. I think in the 7 years since then I've only moved my stop a few times and I always regretted that. I haven't done that in years either.

Funny, but as I write this, I just realized my stomach is in a knot thinking about that one day in October 2004. I guess that's a good thing because I don't ever want to experience that ever again.

Thinking in terms of targets can be pernicious for a new trader. I think its OK to look back at your trading record over a significant number of trades and look at various statistical figures. I wouldn't even then extrapolate on those figures into some future target. Trade your setups and then using your record look for improvements that can increase the potential returns.

hi red, an interesting thread. about 5 or 6 years ago i had a demo account and made several millions with it, i did the same with a playmoney poker site several millions came rolling in.How not like this is real money trading. I am well aware that you possess a good knowledge of trading and you are correct in saying how it is a lot different trading real small amounts versus large amounts. i too have been contacted by agents but the way i trade i think they are nuts to want me to trade for them. i start my week normally with a £2 or £3 pip trade and go for 40 pip gain then get out but sometimes i do let it go. i will compound and when i get what i say is 900 pips i stop then start again.900 pips is actually wrong i normally make about £900 + or - £100 per week. What i am trying to say is a lot of traders think REALLY big. use plenty of leverage and i guess think they'll make millions but come on guys play small and you'll profit. My little girl of 8 trades at .50 pence per pip and she has made a few hundred pounds but she tells me she has now retired lol. You should be able to put on a trade then go watch the match without worrying. take care all, all the best

I suppose then the better approach to target setting should be based upon,

1- system capacity to obtain such percentage within a reasonable risk exposure

that being the case then the logical conclusion continues to be to find ways to mitigate risk and gyrate the current odds in our favor by enacting an intelligent, logical, and sound risk management strategy.

I do propose to have such discussion here.

Speaking to Chicky regarding the Matter in his post "Lesson's Learned"

he puts forth an interesting approach to risk management, which i tend to agree on as it is based on logical approach to gambling on Random conditions ( my belief is that the safest money management needs to work in the worse possible conditions i.e a random market)

He proposes the win:loss ratio to be taken into account when enacting % risk, to derive to a pertinent position size, and stop loss placement.

suppose your system/strategy generates a 60%/40% win loss ratio, then Chicky postulates (as i understand) to use 1% risk per trade as we can extrapolate that if he encounters a string of 40 losing trades then he is at worst case scenario, have an overall risk exposure of 40% .

i believe this is a start.

as Deltatrade here also contributed to the notion of how many trades does your system generate.

then keeping statistical analysis of performance regarding

1- number of trades generated by system/strategy/technique/preferance
2- win loss ratio

i would like to share my way of palliating possible risk in my trading which consist of averaging up. in two parts (so far)

the initial position is at direct risk to my capital as a stop would have to be placed away from volatility, using (2) standard deviations, (here is where i am trying to find ways to further reduce such risk and i have encountered two possible options, either i trade a lot less (i am a day trader) to anchor my initial position in turn increasing position size= decreasing stop loss distance, or trading in the same manner but reducing lot size = increasing stop loss distance.

once the first position is in the positive then i can use that to further build profit by adding a second position as price travels in the same direction.

Good topic.
I have been looking into this myself from the perspective of what do I need to do/ how much money will it take to free myself of the job.

I know a guy that makes his living trading.
I won't go into his trading method or risk management.
He is set up as a business.
He has a business checking account linked to his trading account.
He starts each week with a $2500 trade account balance.
This means if he was profitable at the end of the previous week he banks the money. If he was at a loss he makes a deposit.
He does not make a deposit during the week. (IF it is a losing week then so be it is his attitude. Don't add to the fire)
He is done trading by 11:00 Pacific time on Friday and then he does his banking so he is ready for the next week.

His risk for the week is the $2500 dollars. He keeps a minimum of $25,000 in his checking. Anything more than that is his monthly income.
I believe he is taking in around $6500 a month (+25% return). He trades 6 mini lots per trade ($6 per pip). He averages 15-20 trades a week in the 20 to 70 pip range.

He also takes a percentage and puts it in savings to pay taxes.

He started this with a lot smaller account size three years ago while still working. He quit his job 5 months ago!

I will probably follow this same model as one can look at risk from a weekly perspective and not place as much importance (or should I say stress) on the individual trade.

Just some food for thought.

I think ultimately we all want to do this full time!

Good pips to all.