In terms of the "Excel spreadsheet illusion", returns aren't going to be perfectly linear and consistent. That's just not possible. The point is you're looking for a monthly average over a large sample, say 2 to 5 years, for example. But +/- 1 or even 3 standard deviations is not surprising. Rather than just say, 20% every month, and going 1.20^12 = 8.916, try using Monte Carlo analysis and look at possible standard deviations of the stats of your trading system (Profit factor, win rate, etc).
I'm more of a systematic trader (mechanical) and really it's just playing with numbers and statistics. Eventually the law of large numbers will show a profitable edge (assuming my algorithms are profitable). Sometimes my system will make 10% a month, sometimes lose 10%, sometimes make 40%, sometimes lose 20%. But in the long run it's still a positive expectancy. There's a great YT video that talks about expectations from counting cards in blackjack, and it is exactly how trading works. Except substitute "hands" with "trades". You'll see quite easily the difference between 1 trade/hand and 1 million trades/hands.
In terms of these so-called "professional" traders, they aren't. They're the same as you or I, if not worse. Do you think Soros would start a trade copying service? It doesn't make sense. I agree with insidertrader, it's bulls**t.
Also, another point I want to make is this: as you may know, the majority of these signal services use intraday (scalping), automated strategies which are ran as EAs on their MT4 platform. Now, I'm not against automation at all, but, what I do find disturbing is the fact that they are intraday, and sometimes scalping for just a handful of pips each trade.
Some people might think this is nothing, but this is HUGE. Spreads play a huge role in a trading system. I had a trading system that I had programmed once. I backtested with 0 spread and it gave me 300% return on fixed lots, with 1 pip spread it quickly shrank to 60%, with 2 pip spread it's not a negative system. You'll find that many trading strategies are losers ONLY because of commissions, spreads and slippage. I mean, think about it, price goes up or down, it's just as hard to choose the wrong direction as it is to choose the right direction. The only thing is that you are paying spreads & slippage on every trade.
In terms of comparing your returns to the large hedge funds, you may find that 10-20% a year for a firm is a lot, but there are retail traders claiming to make 100%+ a year. How does that make sense? Well, there's a couple factors. One of the main ones is leverage. Think about it: How many lots are you purchasing per trade? Assuming you had no leverage, does your current balance even have the margin required to open the position and place a stop loss?
As a retail trader, we are offered 1000:1 leverage as a maximum if you look carefully. The reason is because we are not trading with a lot of money. What prime broker can offer a multi-billion hedge fund 100:1 leverage? The fact is, no one. So a hedge fund trades with typically 1:1 whereas we usually trade with 50:1.
What does this mean?
Assume you made 100% this year with 50:1 leverage. Now, assume you were a hedge fund and instead of 50:1 you had 1:1. What this means is your return just decreased by 50 fold. Instead of 100% this year, you would have made 2%. Now that you've scaled your returns, you can accurately compare your return to institutional traders.
Hopefully this post has made some sense. I'm not the best at explaining things.
Last edited by ClarkFX; 08-03-2012 at 01:47 AM.
Most peoples first idea of what they can achieve for a return per month is much higher than what is realistic. I even read an article on a website that said "Limit Your Greed and Make $53,000 per month", then showed some 'conservative' calcs on how you can turn a $1000 account into $53000 per month with 'just' 25% return a month. That is just trying to fill people dreams to get them to buy the course/software/EA whatever.
CONSIDER: You can go to a bank and loan money for 5% per annum (against your house or whatever), or 10% pa unsecured. Forget starting on $1000, if anyone can make 25% per annum you could be a millionaire in 12 months. In fact if you loaned $100,000 at 15% pa, after 12 months you could pay it back in full and put $1mil in your back pocket.
Just an example, but the point is, money is cheap, if it was realistic to make 25% on it per month on it there would be alot of forex millionaires.
In fact, anyone who can make 6% per month will double their money in 12 months, and making 10% per month will triple their money. SO if you are making 10% or even 6% per month, stop waisting your time in this forum, go get your hands on some money, ramp up your position (with same risk) and see you in Forbes Rich list in a few years!
Gee... looks like everyone is still here... interesting...
The difference is risk - the big customers want a nice smooth 10-20% (or less) with minimal risk. This also means the fund must have a system that is scalable and won't break down with large acounts.
Why would anyone buy US bonds at under 5% return? Return isn't everything if you already have the money.
The difference is a retail trader claiming 100% is probably trying to sell you something, a hedge fund claiming 20% may actually be telling the truth.
BTW I have $1 billion. Should I give it to a hedge fund at 20%, or should I invest $1mil at 1000/1 leverage and 100% return and do something else with my $999million?