The Excel Sheet illusion

[Steve_Lee]

THere you go, hope you are satisfied now…
btw, kindly note this is cummulative graph of my daily profit generated for that spesific time period :53::53:

That is a nice looking equity curve. How much are you risking on each trade, your reward to risk ratio?

[ClarkFX]

@liftoff

I remember the first few weeks of reading up on the forex market. I was filled with so much joy and hope. The market had so much to offer, so much money on the table. The brokers made it sound so easy and I wondered if it was too good to be true. Well, after 5 months of live trading, my verdict is yes it was mostly a mirage. The forex market does offer substantial rewards if you know what you are doing, they say.

When I started out I d pull out my excel sheet out and punch in the numbers. If I make 40% a month then I will be making this huge amount in two years wow… After my first month of trading, I cut the number in half to 20% and still the wow factor remained. After the second month I still held on to the 20% goal. I failed to achieve it in my third month and decided it was time to slash that in half too. I then settled on 10% a month. After 5 months I have to admit even that is hard to achieve.

A look at my last 5 months trading tells me, we know nothing about the future. You might have monthly gain goals but the market gives you what it wants and there s no way of knowing what that will be. So I ask, what kind of goals do we set? Because goals keep you on track and without them you are just muddling through. I am currently working on new achievable and sustainable goals (I think) that ll help with my long term profitability. I have currently settled on maintaining a 40% profitability and improving risk:reward on closed trades to at least 1:2.

So I ask myself do we aim for too much a return. The transparent long time traders on Babypips like HappyPip, Huck, Cyclopip and Pipcrawler, show through their quarterly reports that 10% per quarter even looks like a long short.

Again I expanded my search and looked into the best professional traders at currensee for the first half of the year and the returns eye opening but not on the same level the excel sheet promised.

Indeed this market is profitable, but will you make as much as the excel sheet tells you? ( I doubt it)
It s time to develop a new set of goals. Goals that are profitable and sustainable. I welcome all the help. (No need to back up advice with a myfxbook link).

First off, nice post liftoff, it’s really an eye-opener.

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.

Social trading
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.

Institutional trading
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.

Clark

[monkeyzu]

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…

[liftoff]

First off, nice post liftoff, it’s really an eye-opener.

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.

[B]Social trading[/B]
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.

[B]Institutional trading[/B]
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.

Clark

Great input Clark. I am doing something in the lane of watching the same stat numbers… the Sharpe ratio, actual risk to reward on past trades, and profitability of past trades. Until we can get some truly verified, transparent and sustainable average ROI, looks like we are stuck with these.

[liftoff]

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 brokers and marketers sold us dreams that messed with our minds. Even when the market humbles us and tells us those numbers are not sustainable, we still talk ourselves into believing 40% a month is achievable. May we outgrow the marketers and start setting realistic goals.

[EDDY_MO]

That is a nice looking equity curve. How much are you risking on each trade, your reward to risk ratio?

I usually alocate like 0.1 lot per SP and then play with the number of open trades. more or less there is no need of that type of indication, zulutrade is a social forex platform and math financial indications are really of no interest for us followers…the simpler the better, imho!

[PureMuscle]

First off, nice post liftoff, it’s really an eye-opener.

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.

[B]Social trading[/B]
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.

[B]Institutional trading[/B]
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.

Clark

That is a great post Clark! Thanks for the info, it makes sense now

[monkeyzu]

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?