Realistic Expectations

Good morning all,

After a previous false start at trying my hand at trading (due to the arrival of my first little bundle of joy) I have finally found the time and motivation to get back into things.

I am still at the very early stages of developing a trading system and will not be looking at trading with any real money for at least 12 months.

At the moment I am trying define what my objectives are and of course, like most people here, profit is one of them. I know that I can get 6.0% - 6.5%pa from a bank account with very little risk, and I can get 7% - 10%pa in a managed ASX share portfolio with a little higher level of risk. Given that I would be looking at trading ASX shares myself with a moderate capital investment ($50000) and the increased level of risk what sort of returns are realistic?

I know that it is of course going to be dependant on my success as a trader, but I am really looking for very rough indications of what others are achieving. I don't want to set an objective that is completely unattainable.

Is 20%pa out of the question? Are there people doing better?

Thanks for your time.

SuperGreenT

A common question if not always verbalized.

If you think about it I believe if you can out perform the general market then you have achieved success.
Now at various times that will be at a different level.

If in a bull market the general market rises 10% and you trade at 11% then you have success.
If its a bear market and you trade at 2% gain while the market falls 2% then you have also had success.

Out performance way beyond the general market is possible.
CONSISTENT out performance should be the goal.

Many systems dont do this every year/or month.
However development of a trading system which is consistent should be the goal.
20-40% is EXCELLENT
Beyond is rare. Particularly consistently over a very long period--years.

The most accurate answer to this question is: trade for a year and see what you get. If you get 20%, then 20% is realistic for you. If you get 100% then 100% is realistic for you.

While an average excellent [consistent] return might be 30+%pa, you're not the average. You might be brilliant or useless or ...whatever, somewhere in between. Don't assume that being successful at a normal job will make you a good trader or investor. Different attitudes are often necessary.

Do something. Just open your online broker, pick something [anything!], choose a time frame and trade it as best you can. Risk $5000 or $2000 or $500 if you're really chicken, and see what happens. If you're scared to even pull the trigger ONCE, likelihood is you will fail over the long term. No amount of learning or paper trading will get you that basic level of confidence.

Gringotts Bank said:

Do something. Just open your online broker, pick something [anything!], choose a time frame and trade it as best you can. Risk $5000 or $2000 or $500 if you're really chicken, and see what happens. If you're scared to even pull the trigger ONCE, likelihood is you will fail over the long term. No amount of learning or paper trading will get you that basic level of confidence.

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You cant be serious.
Good thing she/he didn't ask about Brain surgery.
I didn't see the phrase "paper trading" anywhere?

I am still at the very early stages of developing a trading system and will not be looking at trading with any real money for at least 12 months.

but I am really looking for very rough indications of what others are achieving. I don't want to set an objective that is completely unattainable.

Click to expand...

Good work test your methods and re test them.
Learn how to test a method correctly.besides profit there are many other aspects which need to be addressed and it will take those 12 months to learn and understand what they are.
EG
Draw down both initial and peak to valley.
Smooth equity curve.
Maximum draw down
Time for recovery from trough to next equity high
Portfolio heat
Underwater equity
return on $ invested
Expectancy
maximum string of losses.
time held for winners
time held for losers
% stopped out
Maximum deviation both high and low from the mean
How does the system perform with the biggest winners and biggest losers removed.

To name a few.
The most vertical learning curve you'll encounter is through systems testing.

tech if you gave your precious system to 100 very motivated and intelligent people, all keen to make a buck, only some of them would actually make money. In fact what you'd find if you plotted "% return vs participant #" for all 100 participants, after 12 months it would resemble a bell curve. Some would lose, the majority would make a small return and some would do very well. Now here's the clincher: the very same bell curve would be found if ANY "successful" trading system was revealed to the public. It's not the system that makes money, it's the person running it.

Gringotts Bank said:

tech if you gave your precious system to 100 very motivated and intelligent people, all keen to make a buck, only some of them would actually make money. In fact what you'd find if you plotted "% return vs participant #" for all 100 participants, after 12 months it would resemble a bell curve. Some would lose, the majority would make a small return and some would do very well. Now here's the clincher: the very same bell curve would be found if ANY "successful" trading system was revealed to the public. It's not the system that makes money, it's the person running it.

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If they adopted the procedure you outline below then they would be better off at a table in Crown Casino, that's a gambling mentality.
I hope you are joking and I also hope that you never teach anyone to drive - "here's the keys, off you go, see you when (if) you get back".

Gringotts Bank said:

Do something. Just open your online broker, pick something [anything!], choose a time frame and trade it as best you can. Risk $5000 or $2000 or $500 if you're really chicken, and see what happens. If you're scared to even pull the trigger ONCE, likelihood is you will fail over the long term. No amount of learning or paper trading will get you that basic level of confidence.

Click to expand...

Gringotts Bank said:

tech if you gave your precious system to 100 very motivated and intelligent people, all keen to make a buck, only some of them would actually make money. In fact what you'd find if you plotted "% return vs participant #" for all 100 participants, after 12 months it would resemble a bell curve. Some would lose, the majority would make a small return and some would do very well. Now here's the clincher: the very same bell curve would be found if ANY "successful" trading system was revealed to the public. It's not the system that makes money, it's the person running it.

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Actually The bell curve would be within the parameters of the results found in
Monte Carlo testing
Which ranges from a low of 16% to a high of 42%
most are at 28% the center of the bell curve

Boggo, you don't get it. Your special system doesn't work either. You make it work, (or not!).

I'd bet the house it wouldn't work out like a monte carlo test. Some would lose a lot of money despite their best efforts. And some would make 70%+. tech you yourself talk about systems and yet when it comes down to nuts and bolts you use discretion to choose what you buy and when!!!

Gringotts Bank said:

Boggo, you don't get it. Your special system doesn't work either. You make it work, (or not!).

I'd bet the house it wouldn't work out like a monte carlo test. Some would lose a lot of money despite their best efforts. And some would make 70%+. tech you yourself talk about systems and yet when it comes down to nuts and bolts you use discretion to choose what you buy and when!!!

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Well that would be interesting to see
As from 50000 portfolios not one made a loss
And the best return 42%
To see a loss or 70% would be an education
Anytime you want to put up that house just holla

Gringotts Bank said:

Boggo, you don't get it. Your special system doesn't work either. You make it work, (or not!).

tech you yourself talk about systems and yet when it comes down to nuts and bolts you use discretion to choose what you buy and when!!!

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That's my point, you have to learn how to recognise when it will work from both an individual stock through to the overall market environment.

You cannot learn that just by throwing money into a brokerage account and gambling/losing it which is what you are suggesting here...

Gringotts Bank said:

Do something. Just open your online broker, pick something [anything!], choose a time frame and trade it as best you can. Risk $5000 or $2000 or $500 if you're really chicken, and see what happens. If you're scared to even pull the trigger ONCE, likelihood is you will fail over the long term. No amount of learning or paper trading will get you that basic level of confidence.

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Good evening, and thanks to all that have responded.

I understand that everyone has their own approach to a new endeavour, ranging from 'both feet first' to a cautious 'toe in the water'. I am sure that Gringotts Bank approach would result in some excitement and may even teach me some valuable lessons, however by profession I am an engineer. I have not fallen into engineering by chance, it is a profession that suits my personality perfectly and it is this personality trait that will have me test and re-test trading system ideas over and over again before I spend a cent (and I have time constrained myself to 12months to ensure I do actually start doing something instead of testing until the day I die)

Thanks to your advise I have some very rough limits that I can work within (eg. better than the market, but probably not any more than 20%-30%). It's a starting point and at least gives me an idea of what might be possible given the right system.

Once again, thanks for the time you have spent responding.

SuperGreenT

SuperGreenT said:

At the moment I am trying define what my objectives are and of course, like most people here, profit is one of them. I know that I can get 6.0% - 6.5%pa from a bank account with very little risk, and I can get 7% - 10%pa in a managed ASX share portfolio with a little higher level of risk. Given that I would be looking at trading ASX shares myself with a moderate capital investment ($50000) and the increased level of risk what sort of returns are realistic?

I know that it is of course going to be dependant on my success as a trader, but I am really looking for very rough indications of what others are achieving.

Click to expand...

Doing what i do (open term, low risk, no margin, low cost averaging for dividend yield and longer term capital gains) you could expect a realistic return of around 12 > 16% PA...many wouldn't call it trading cos im only averaging a trade every 3 weeks or so.

SuperGreenT what you need to find out is what type of share market activity is profitable and thus comfortable for you to be involved in...day trading is not suited to everyone, find out what suits you.

SuperGreenT said:

Is 20%pa out of the question? Are there people doing better?

Thanks for your time.

Click to expand...

I would consider 20% pa on your investment in stocks to be completely reasonable if you trade well. Indeed, I would consider it a minimum target benchmark. There are people in this forum who do much better than this. Of course, there are people who do much much worse.
Indeed there is a thread here about 'what is your yearly return' that you might want to look up.
One thing to keep in mind is that there is always a counter-party to every trade. To be successful, you need to be right more often than those you trade with are wrong (excluding the effects of inflation, costs and dividends). This may sound daunting, but I have heard the stupidest motivations for buying a stock come from people. 'Oh, Company X is good.' 'Company Y makes steel, and everyone needs steel, therefore its stock price can only go up' etc.

Good luck, do lots of research before you do anything. A book you might want to look at is Roger Montgomery's 'value-able'.

Most professional fund managers only manage to beat the market return by 1 or 2 % over an extended period of time, but its not easy getting alpha out of billions.

Because you (and me) are small time players, we can exploit inefficiencies that bigger fish cannot because of liquidity, make sure you play to that strength.

Read as much as you can, but remember that even in the best trading books there will only be tidbits of useful information for you.

Having a proper grasp of statistics will help.

Discretionary traders can achieve the highest returns, weighing various market factors in their own head to make their own trading decisions. If successful can make anywhere from 20-100% return a year long term.

Systematic/Mechanical traders achieve more consistent returns and find it easier to adapt when the market changes. I reckon the average long run return for a successful mechanic trader is probably 20-60%.

If you can average 20% a year for 10 years, you will have a fairly decent roll at the end of it.

Another thing you need to take into account is the time spent trading. Even though it is fun, a mechanic system that makes 30% a year and takes you 1 hour 5 days a week is better than a discretionary method that makes 30% a year and takes 5 full days a week.

I put the orders in generated by my system at night and they are executed at the open while im at work. I dont have to worry about anything because I know that:

A) I have a positive expectancy
and
B) I have a stop, the maximum I can lose is 1.6% of my equity.

What was that quote from the book, Market Wizards?

To be successful you need to find a method that matches your own personality.

I think the best thing you have done is given yourself 12 months to learn before risking any money. So many wanna be traders start trading straight away and blow up before they have the necessary tools to break even.

SuperGreenT said:

At the moment I am trying define what my objectives are and of course, like most people here, profit is one of them. I know that I can get 6.0% - 6.5%pa from a bank account with very little risk, and I can get 7% - 10%pa in a managed ASX share portfolio with a little higher level of risk. Given that I would be looking at trading ASX shares myself with a moderate capital investment ($50000) and the increased level of risk what sort of returns are realistic?

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With $50K and with proper risk management, I'd say -20% to +200% are all realistic. As an objective, it certainly depends on the system. The question you should ask yourself is - what is the purpose of this objective? Sure it's something to aim for, but what are you going to do if you do/don't reach it? There is no point setting something at 50% - you will either try to reach it by taking too much risk, or may be it will discourage you if you only make 35%.

For me I do have an objective with my trading, but I determined that objective in a slightly different manner.

1. I calculate the parameters and boundaries of my system (through doing 500+ trades - and I my only objective then was to learn about the methodology)
2. I look at what position sizes I am comfortable with (taking $2K, $20K and $100K positions feel very different even though the mechanics are the same)
3. I use the position size as input into the system parameters and determine the return
4. I make sure my capital can support the position size

So as you see I have an objective that is rooted in maths, rather than an aspiration. And I use that objective to measure my performance, knowing that in normal circumstances I should achieve that. And if my actual return lags the expectation too much, then I need to review what I am doing wrong. I don't expect or aim for 200% return - because I know that's not what the system is capable of consistently - nice if I get it one year by fluke, but I am not going to set that for the next year either.

Also, as you try to search and find the right system, keep in mind the following:
- A high frequency system will outperform a low frequency system (all else being equal).
- A high frequency system will generally imply a shorter hold duration.
- A system that uses leverage will outperform a system without leverage, but not necessarily with increased risk.
- A system that utilitises internal compounding will outperform those without.
- A system that trades both long and short has a better chance of making consistent positive return year after year (it's very hard to make money trading long-only in a bear market).

That's why many trader eventually find their way into short term futures / FX markets because of the above... but we are probably getting ahead of ourselves.

Good luck.

So 20% seems to be the general consensus for a 'realistic' return. With a few years experience and time to tweek and learn your style it is probably a good goal. Is it really 'realistic' for a beginner though?

Paper trading and testing a system is fine but psychology suddenly becomes a far greater part of the process as soon as the OP is putting in their own hard earned cash. For someone just about to begin, give yourself some time to work up to those levels. As long as you are beating the cash return of interest in the bank after expenses you are better off. Might not seem like much for your time and effort but the experience will surely see you better off in the future. Markets are still doing it tough and depending who you believe we could in anything from a long term period of little return to the beginnings of another bull market. It is probably hard for someone with a lot of time and experience around the market to remember just what sort of affect this can have on a new trader. Without knowing more about the goals, risk profile and experience of the OP it's hard to give advice on a question like this.

TabJockey said:

Most professional fund managers only manage to beat the market return by 1 or 2 % over an extended period of time, but its not easy getting alpha out of billions.

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I don't follow fund managers, but my understanding is that few even manage to match the market; not the least reason being fees.

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Realistic expectations?

How long is a piece of string?

There are so many factors involved that even a ballpark figure is impossible to come up with.

Some people are stoked with 15% average... that wouldn't be worth the time and effort to others.

Hi wayneL,

Nice horsey pics in your avatar.
Do you have a full size that you would care to share!