mit said:Why is the trader not using the $40k eight times quickly? That's more the reality. I probably turnover my capital 7 times a year (more actual if you take account of leverage).
Yes I hate paying the interest and brokerage but it's still very profitable and "consistant"
MichaelD said:I'd like to make an attempt to bring this thread back to something that there is actually a point in discussing (rather than wasting time on circular arguments).
A while back, BSD posted a rather interesting question.
"Why dont the investment banks just hire a team of chartists with etrade accounts and margin loans?"
This has got me thinking. Why don't they run funds like this? Here are some of the reasons I can think of;
1. Chart trading requires the psychology to accept losing most of the time. Most people cannot handle this. Put an extra layer on top of this - the investment banking bureaucracy - and you have two layers or more of psychology to get through before being able to handle trading this way. I'd argue that the chances of this sort of culture existing in an investment bank are close to zero. To put this another way - I'd argue that few people in the investment bank industry know how to trade and rather rely on very deep pockets to survive at sub-index performance.
2. The people investing their money in this endeavour would need to be able to cope with drawdowns. The natural behaviour of most people is to put their money into outperforming funds and pull their money out of underperforming funds. This is exactly the wrong thing to do for trend following. This will lead to problems of having to close positions at the wrong time for a fund in order to cover withdrawals from the fund. In other words, there is a third psychological layer to get through.
3. One of the edges a private trader has over an investment bank is size. By and large traders can enter and exit positions without moving the market. This is impossible once you get above a certain size and would make it harder to be profitable as a large scale trend trader. I believe Soros has a word for this phenomenon, but it slips my mind at the moment.
I note with interest that in the US there are boutique funds that do indeed invest technically and even mechanically - I am unaware of any such funds in Australia.
Food for thought.
Realist said:Good point!!
But you have $40,000 in total and only put $5,000 on each trade the return is only $3920 on $40,000. It all depends what you do with the other $35,000.
Prof, if you have $40,000 to your name - how much would you place on each trade?
If I had $40,000 - I'd invest between $20,000 and $30,000 in about 6 to 8 different shares. $10,000 sits in the bank - as a safety net and incase I see a great opportunity to buy.
My return would be about $10,000 * 0.05 from my bank account. And $30,000 * 0.12 from shares. So about $4000.
Say 10% after all taxes and expenses. (more in bull markets, less in bear markets)
Realist said:You put all of your capital into each trade?
cuttlefish said:It'll teach them to think about what it is they're actually buying when they buy a share, and think about why they are buying that share. It'll cause them to start to think and act independantly.
professor_frink said:Now I wouldn't be comfortable having 1/4 of my money tied up in one share,
Realist said:Sorry, I missed this question Nick. (Snake reminded me)
Well I'm guessing number 3 is the amount invested.
You may say the number of trades though?
I'd say you need to include both, but the amount is the key in my opinion.
1000 trades of $100 will get you nowhere, tax, brokerage and stress will kill you. But 1 trade of $1 Million with a 100% win is a great result obviously.
professor_frink said:Realist,
The more important part is the number of trades. The first 2 attributes nick mentioned are used to calculate expectancy . From there, the number of trades determines how much you can make. For example, if you are evaluating 2 trading systems with the same expectancy, the amount the system trades will determine which should be more profitable overall.
Snake Pliskin said:A terrible answer Realist!
Realist said:Thanks Prof, what you do sounds wise. Basically the same as an investor diversifying.
And that is my point MIT. You'd be a brave man to put ALL your capital into each trade.
As we discussed yesterday there have been cases where a share drops 80% overnight - unlikely of course, but it has happened and could possibly happen again.
Kitty Hawk -on the Nasdaq was the one. 93% in a week, 80% overnight from memory.
Realist said:Thanks Prof, what you do sounds wise. Basically the same as an investor diversifying.
And that is my point MIT. You'd be a brave man to put ALL your capital into each trade.
As we discussed yesterday there have been cases where a share drops 80% overnight - unlikely of course, but it has happened and could possibly happen again.
Kitty Hawk -on the Nasdaq was the one. 93% in a week, 80% overnight from memory.
mit said:I'd add to this drawdown (or shape of the equity curve). A lower drawdown enables the trader to gear more or get a more consistant return with lower leverage. I've seen some published systems that look great for the first three items but have deep or long drawdowns.
I think it depends where you head is at. I want to live on trading so I want to make salary every year.
Realist said:Thanks.
you think the amount traded is irrelevant?
I am happy to debate but I, and no doubt others, would like a sensible answer. There are 3 cornerstone attributes to profitability and I do say that every trader/investor on the planet does pocess them. I'll give you two, you give the the third, then we'll discuss.
1. Win %
2. Win / Loss ratio
3. ?
mit said:But it was your strawman example? So why is $40k in one share for a year not dangerous as well?
MIT
Realist said:I would not put 100% of my capital in any one share ever.
But there is a difference to what investors buy and traders. Traders look for better returns and take more risks - hence they need stop losses.
An Investor may buy CBA for instance - dead boring but it'll be around next year. Traders may buy BMN - it may triple, it may go under, who knows?
But trading with 100% of your capital in one stock is risky in my opinion even with stop losses - what Prof Frink does seems about right to me. What MIT does may come unstuck one day.
Nick Radge said:I have a very close friend who starts each year with $25,000 in his account. By year end he's usually at $500,000. His accounts statements since 1999 reflect this each and every year. He has no concept of drawdown or percentage return. He simply has $25,000 to start and builds by trade frequency alone, not compunding his positions. He does 4 to 5 trades a day, all the same size and usually whilst on the golf course. He does not look at charts. He does not use FA. He rarely even looks at his computer. Gut instinct and a remarkable ability to remember price activity.
But still explain why the trader buying CBA is limited to $5k because of the risk
Realist said:My point is how many traders waste their time buying CBA?
Most investors have a bank somewhere in their portfolio though.
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