Hello all,
I’ve been studying the FX market for a few months, and have had a few demo accounts, learning the ropes, etc.
In my survey of the FX community I find that there are a wide range of opinions on profitability, worst thing is that there is no verifiable body of statistics to work from in order to make assumptions.
It seems the standard Wall St. rule of thumb is that top traders make 20-30% annually, on a fairly consistent basis. We’re talking big money here of course, nine-ten figure funds where orders have to be worked over a day, not the instant hit bid/ask stuff that retail traders do. Some big heroes in the commodity world like Paul Tudor Jones can net a 100% return several years in a row. But the Paul Tudor Joneses and Ed Seykotas are a rarity.
Articles in futures magazines have interviews with traders who are proud to say that they’ve made 40-50%, maybe getting lucky occasionally and hitting a 100% return one year.
Alexander Elder mentions in “Come Into My Trading Room” that he’s oriented on 20% a year. Now Elder is definitely a very well learned trader, I can tell the guy isn’t an idiot - he even developed two indicators. However, according to him it seems that unless you’ve got half a million bucks in a trading account, there’s no way you can play the game and live off your trading.
On the flip side, the internet is full of urban legends who turn five and even four figure stakes into over a million bucks in just a year or two. The Wall St. journal had an article on one FX trader, Ray Firetag, who using a fundamental based strategy was able to turn a 50K stake into “north of seven figures”, and he started trading in March of '08 (blew out one account, then scored on the next one). He had no previous financial experience whatsoever.
There are books like “Millionaire Traders”, where this one guy Hoosain Harneker managed to turn a $1000 stake to six figures in just three years shooting for 10 pips a day (with a 20 pip risk per day). There are news traders there who turned $5000 into $100,000 in a few months, and so on.
Then there’s 90% of the rest, who manage to earn negative returns of 90-100% in six months
Now, you’re somebody like me who wants to trade for a living. You think that this is the coolest job that ever is. You don’t want to do this for a few hours when you come home from work, you want this to be your main bread.
Obviously, 20% a year is just not going to cut it, unless you’re an MD like Elder, for whom saving up a six figure sum while learning the ropes is reachable within a few years.
If you started with a $10,000 stash (reasonable for most middle class working people), if you attained an average 20% performance a year it would take you an entire 25 years to work your account to about half a mill (inflation adjusted), at which point you can finally live off it. It’d take you about 10 years less if you added $10K each year from your savings.
So the question now stands, who is right and who is not?
Street wisdom says 20%, with 100% being the big home run you score every now and then, if things go your way. Urban legends speak of much greater returns, and people with five figure trading accounts who make 100%+ returns a year, as well as people who daytrade with such accounts and live off their trading alone.
My assumption has been that with daytrading, it is theoretically possible to make more money because of the compounding effect (Martin Schwartz, profiled on Market Wizards, had a 25% per MONTH average return before he started managing other people’s money). It seems most of the fulltime traders are very short term, and those are the ones that apparently trade for a living. However, there is a school that says that daytrading is bunk and after commissions you’re a loser compared to the swingtraders, you sit in front of the monitor all day and net you’re down compared to the swing traders.
Swing traders, however, all seem to universally swear that 20% is the bacon you want to aim to take home, and that anyone who is making triple figure returns has got to be taking on too much risk, and is simply riding a good wave before it crashes. Most of Wall St, for that matter, is also swing and longer term oriented, except the boys hopping around in the NYMEX and CBOT pits. They say if you haven’t got enough dough, develop a solid record for a few years and go trade for a bank or get the money of friends, family, and fools.
Granted, I’m at the stage where I am still scraping the breakeven bar, but I want to be able to set solid goals. I believe in the 2% per trade risk rule, and I’m fine with sticking with that. I want to be able to trade fulltime. Within a few months I’ll have $10K ready to go (assuming I have a good stretch of profitability), meanwhile I’m on one of those $10 accounts and trading with teensy contracts. I live with the folks, so my expenses are as low as they can be.
Are there any thoughts on my long treastie here?