How Realistic is This?

Beginner Questions
1

So I have my trading plan written, my trading system is going to be the moving average crossover from the School of Pipsology on the four-hour charts for EUR/USD, GBP/USD, and AUS/USD to start with. I plan on swing trading as I have a full-time job I need to work around. I start backtesting these pairs tonight over the course of the last year.

My question is how realistic is a 3% return per month on average over the course of 10-20 years. My plan is to swing trade for the next 10 years or so while building up my account starting from a $2,000 initial deposit and adding between $300 to $500 per month extra as time goes on, plus actively trading my account. I know I won’t hit 3% per month consistently, but my curiosity is if after 120 months one could say a 3% return average is a reasonable expectation? I am not sure if backtesting each pair for one year would give me a realistic expectation for over a 10-20 year time frame, so I am hoping some of the more experienced traders could chime in on this.

2

The only thing your plan didn’t mention was the months spent forward testing your trading plan in a demo account.

Other than that, I say only go into your own pocket if you draw down your real money account to under $1000. But if you draw down your account by 50% then I think it’s likely that you have other issues to address, rather than ponying up another grand in cash.

Also, I think it’s most beneficial to maintain strict money management, and focus on pips earned rather than dollars or percent of account earned.

Best of luck. Post updates.

3

I plan to demo trade for 2-4 months before depositing real money, and my goal with small deposits over time is to build up my account balance faster to try and reduce the time it will take to earn money that will actually have an impact in my life. My trading plan only allows me to risk 1% per trade, so with a $2,000 account that would be $20, which won’t earn a whole lot even if I make 150+ pips a trade.

Now if I had a $100,000 account I would be risking $1,000 per trade which could generate some good returns, at least in theory. So by making additional deposits on a regular basis over the course of a few years or so, I can get up to that level faster than by trading alone because the deposits could offset some of the losses I would incur.

My reasoning behind the monthly average rate of return is because I look at trading earnings as being similar to compound interest, at least, similar mathematically. By setting an average rate of return I can do some forecasting to see how long it would take me to earn a full-time income, which I define as $120,000 per year, from my trading which gives me a yardstick to measure myself against.

4

Do you know, confidently, that your proposed trading system has a genuine edge and is robust?

I ask because my long experience leads me to believe that a moving average crossover used as a method of timing the opening and closing of trades doesn’t, and isn’t.

It can be a good way of telling, or defining, when a market’s trending. When the fast moving average is above the slow one and both are rising (don’t forget that part!) there’s an uptrend, and vice versa.

But trade entries and exits? Not so much.

3% per month is realistic for someone with a robust method with a proven edge, if applied with the correct position-sizing and risk management.

2-4 months, for trades arising from 4-hour charts, is very, very little demo experience.

1% risk per trade is sensible.

Backtesting each pair for one year won’t and can’t give you a realistic expectation for results over a 10-20 year time frame.

The big issue here is whether you honestly have a robust system with a proven edge.

I don’t think you do.

Just my 2 pips.

5

This is the piece I was looking for, thanks! I figured one year of back testing wouldn’t be enough of an indicator, so I was hoping for someone who has been doing this for quite a while to either validate or invalidate that idea for me.

No, because I haven’t tested it yet - right now, I am just looking to get an idea of what realistic expectations should be. I start back testing tonight, and based on those results I might be modifying my system and re-testing, or moving to demo trade. Based on your reply I will certainly increase my time spent demo trading - plus it will give me more time to save up risk capital for when I do go real money.

I expect that I will be needing to develop, tweak, and test my system a lot in the first 3 years or so until I get that robust and reliable edge. Having an idea of a realistic return monthly though can help me forecast what my returns should be at various points in my career so I know if I am on track of reaching my goals.

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6

You’re welcome.

These things take time.

A robust system with a real edge can actually make more than 3% per month.

One of the difficulties is that that monthly average of +3% can take a very long time to even out as an “average”.

Especially when you’re trading from 4-hour charts.

The components averaging out at +3% might swing between +12% and -6%, for example.

If you have two or three months of -6% close together, will you continue?

Sorry to ask difficult questions, but you need to know the answer to that before you start. Before you start trading, that is, not before you start demo-ing.

7

I can tolerate a long drawdown which is why I plan on making regular deposits of new capital into my account once I start trading for real.

I certainly don’t mind more experienced people asking me hard questions - it’s almost like having a coach! :slight_smile:

My reason for going on the four hour charts is because I have a full-time day job, and can only spend 3-4 hours a day in the evening looking at my charts, so I figured swing trading the 4 hours would be best, for now, then moving into smaller time frames as I develop my analytical skills.

I am not going to be quitting my day job anytime soon or any time before I start earning > $100,000 a year and having $150,000 in liquid savings as emergency reserves so long drawdowns won’t be a financial strain. I can’t speak to emotional strain yet because I just don’t have a frame of reference for that.

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8

I’m not trying to imply that you shouldn’t use 4-hours charts, of course. I know they suit some people and I understand why.

I’m just commenting that they slow down the research and backtesting and forward testing massively, compared with faster stuff.

I see the logic there, but best to be really certain, if you might be in a position where it’s making some losses and you’re still adding funds to it, that it does have a real edge.

1 Like
9

Fully understand, but still, I like to explain my reasoning in case others can see a flaw in my thinking that I didn’t know of or that I overlooked. Also, there might be others thinking like I am and this might help to answer their questions as well.

My assumption here is that by the time I get to putting real money in the game I will already know what my win percentage is, what my average pip per trade is, and how to best manage my money to ensure that I minimize my losses.

With only 4 hours a day would trading on the hourly charts be too fast a timeframe, or should I include that chart in my testing as well?

10

I’m just mentioning that it’s really going to need a lot of backtesting and research, to know that.

Sorry, I don’t know.

I understand your approach to timeframes and why you want to do this.

There’s another way possible, too. You can “go fast” instead and trade something fast moving, when you’re available, inside the hours you can manage. If I had only 3-4 hours a day, to trade, I’d probably be looking at 3 minute charts. It’s a really radically different approach from what you’re thinking of and it may be that what you’re thinking of will suit you better and maybe even be safer too, IF and as long as it has a real edge. But that’s a really big IF, and it stretches my imagination too far to think that a MA crossover really will.

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11

Thanks! I’ll keep digging around the forums to try and put together a faster system for these lower time frames and see how it does in testing. I hadn’t really thought about trading the fast charts given that the education section on here says the lower time frames require more time spent on the charts.

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12

It’s true - they do.

But 3-4 hours per day is a lot of time.

The great advantage is in numbers of trades. The bigger the sample size, the more reliable the statistical conclusions based on them, and potentially the smoother the progress.

1 Like
13

So, to the question, is 3% return per month a realistic goal. Sure, it can be done. Not by everyone, only small percentage of traders is profitable at all. Best ones make more and most do less. So it all comes down to how good is your system and how good of an trader you are. You have atleast an right attitude and don’t try to become millionaire in few months. But have to say, Im bit skeptical on too simple rigid systems, I doubt that the moving average crossover system will make you that 3% per month.

I have personally gotten a lot better results after I abandoned trying to follow different systems, and read a lot about candlestick patterns, resistance levels, chart patterns etc and spend a LOT of time trading demo account. Currently I trade mostly 5 minute charts and spend 4-8 hours a day doing it, and I really have to say that there is nothing that can beat pure experience, after all the work done, reading the charts come “natural”. While I understand that you may not have the time to do the same, I truly believe you could benefit from trading demo account on smaller time scale.

14

Really good advice, right there.

15

Ok, I just finished back testing EUR/USD on the 4 hour chart and this is what I learned.

First, trying to get historic data in NinjaTrader for free is like pulling teeth from a crocodile. Lowest level I could get was daily. So I signed up for a 30-day trial from Forex.com, downloaded their client, and launched their advanced charting to get to a dressed up version of TradingView.com. Regardless, it worked, so I went with that.

Second, my strategy gained a total of 494 pips over 18 trades for the last 12 months. The win rate percentage was 55.5556% and the average pips per month gained was 41.1667 pips. Even at a $500,000 account swinging a 50 pip stick, this strategy wouldn’t yield anything near a full time living. I attribute that to the low number of trades this strategy generates.

I might keep this in my plan because after all, it was 41 pips on the EUR/USD pair, but it is not going to be my main focus. It does seem to catch a few good trades here and there, with my best trade being 220 pips and my worst trade being -26 pips. It only took me 90 minutes or so to back test on the four hour chart, so I will probably back test a few more pairs under this strategy just to satisfy my curiosity.

However, it’s back to the drawing board to read up on patterns and Fibonacci levels because they seem interesting and I definitely like having support/resistance levels available to me as a tool for setting targets and stops. The strategy I back tested relied on a fixed 100 pip stop and waiting until the moving averages crossed in reverse or RSI to cross over 50 in order to exit the trade. Not my cup of tea…

Anyone have any advice to offer regarding what patterns or other technical analysis tools I should be focusing on learning next?

16

Great conversation going here. I am a bit more of a risk taker, and I would advise if you have a few hundred bucks to play with. Go live. I am not a fan of demo, other than to learn to use the software. If you plug say $500 into a real account, you now are dealing with the spread and or commission and or swaps etc… which are a real reflection. I also thing forward testing is where you learn the most about your trading , psychology etc.
I personally have opened several $500 accounts to start, and simply call it my education fund. I guess it is a matter of perspective.
Good Luck on your journey.

17

I am a bit more risk averse than that, especially at this stage of my trading development. I would like to get my strategy sorted out first and tested so I have an idea of what to expect. Right now I am trying to formulate some rules for entry based around double tops / double bottoms and .618 retracements but I am not quite sure how to write them.

For example, to get long, I want to see a double bottom and a retracement to the .382 level on the 5-minute chart with an uptrend on the hour chart. Stops would go at 25 pips below the lowest close in the double bottom, and target 1 would go to the .618. If .618 is reached, stop goes to the .382 and target 2 goes to 1.272. Stops trail by 15 pips on the way up to the 1.272 to maximize profits in case of a market reversal.

Hmm… I guess I just wrote the rules that I had a hard time writing :slight_smile:

For short trades, same thing except with double top instead of double bottom. Of course, my fib levels are fairly arbitrarily chosen, and the trade setup is strengthed by those levels corresponding to previous support/resistance levels but doesn’t require them.

Am I on the right track in thinking about this?

18

You understand that results from 18 trades have no real statistical significance, right?

When you have the results of 1,800 trades, you have something to look at and analyse.

This is part of the problem of a 4-hour chart system that trades once every 6 weeks.

It might work. It might not. It’s going be terribly difficult to tell which.

But you need to know first, so you can make an informed decision about what to do when it has a 6-month losing period, because this system, whether it has a real edge or not, WILL have a 6-month losing period at some point.

All Fib levels are arbitrary anyway. Fib levels aren’t real. That doesn’t necessarily make them invalid or a loser, it’s true. Millions of people believe in the I Ching, and thousands of people trade according to the phases of the moon (honestly, they do) and some of them swear it’s profitable. I’m not advising you to use Fibonacci, or not to use it, just to appreciate if you want to use it, that you’re using something which has never had any real, mathematically valid evidence for it published, other than anecdotal stuff produced by its own enthusiasts.

I wince when I see people wanting to trade and wanting to make money from it, however modest and sensible-looking their ambitions, when what they’re asking for advice about is something based on “moving average crossovers” and “Fib levels”. Everyone starts off in this business with the odds against them, and these two parameters just aren’t things that will help to get the odds in their favour.

19

Yep… which is why I am not using that system. I have some curiosity about it, so I will be using some of my free time that isn’t allocated to trading for further testing on additional pairs and more data. My thinking is that this system wouldn’t be used as an example in the School section if it wasn’t a valid system. While it may have a low expectancy of profitability, there has to be some sound logic behind it based off someone’s experience.

What should I be looking at to base my entry and exit rules off of? My apologies if you already stated it and I missed, I am sort of learning the lingo on the fly. The educational materials made sense when they described Fib levels as being popular spots to place orders at making it a somewhat self-fulfilling prophecy.

Or is a real edge in trading completely illusionary?

20

It shouldn’t be used that way, as an example of trade entries/exits.

Unfortunately, some of the authoritative-looking material with which the site directly and indirectly attracts traffic has no real validity.

Somewhere along the line you’re going to need an understanding of price action.

I’m not suggesting you should avoid indicators, but the people who are trading profitably with indicators also have a good understanding of price action parameters. Acquiring that takes time and experience.

Many successful retail traders are using one or two indicators (rarely more) to determine “trend”, according to their own system definitions, and then using price action to time their entries in accordance with the trend their indicators have determined.

A moving average crossover with one or two additional rules could be a perfectly good way of identifying the trend.

It’s a mistake to imagine that one can easily find a working system with a real edge and just copy it, without that understanding, and that everthing will work out ok.

It almost never does.

The reasons that’s so also need quite a bit of experience, to be understood.

Sorry for telling it like it is.

No, it definitely isn’t.

And nobody should be trading with real money without having a real edge (but of course large numbers of people are - many of them don’t even know how to tell whether they have a real edge and are just trading on a wing and a prayer and a Fib level and thinking something like “Well, it said so on some authoritative-looking website, and loads of other people seem to believe it”. Those aren’t people who are making a profit.)

But there’s much, much more to developing one than moving average crossovers and Fib levels, and it isn’t a quick or easy thing to do.

Again, sorry for telling it like it is.