Performance Expectations (ForexHound.com the Forex Trading Portal: Performance Expectations) If you hang out in trading forums for long enough, you start to get a handle on how unrealistic trader’s performance expectations actually are. For example, it is not uncommon to hear stories of new traders who are hoping to use their tiny trading account and replace their day job. For example, assuming you earned 50 thousand dollars a year as a wage slave and you had a trading account of 10 thousand dollars, then you are expecting 400% return on investment to be able to support your dream of “financial freedom”. Many of the “old hands” in the forum immediately respond to the beginners on the forums and caution the neophyte trader that expecting 400% return in a year is too high and they are highly likely to blow up their account in their race to achieve it. They then proceed to tell them that if they can just consistently earn a mere 6% a month, they can make a more attainable 100% return on their investment in a year. It is at this point, the neophyte trader realizes that even if they could achieve this, financial freedom is not achievable with a $10,000 account and they start saving up for a bigger stake, believing that with a $50,000 account they can replace their job. At some stage, the beginner will start reading classic trading books, like Alexander Elder’s “Come into my Trading Room”, and it as they stage they begin to sense that even this goal is too ambitious. Alexander advises his reader that a really experienced trader does not expect to make more than a 30% return in a year. And if it is a really bad year, then they can hope to break even at best. When a new trader reads that, their heart drops as they realize that perhaps short of having a 150K to 300K in the bank they will never attain the elusive state of financial freedom. The question that beckons, is even this realistic? How much does a Professional Currency trader really return in a year? The Benchmark Barclay’s provide an index that can answer exactly that question. The “Barclay’s Currency Trader’s Index” is an equal weighted composite of managed programs that trade currency futures and/or cash forwards in the inter-bank market. In 2008 there were 145 currency programs included in the index. Okay – are you ready for it? The average annualized return of funds participating in the index is, wait for it, drum roll …. 10.12% What …………………….. 10.12% …………….. Noooooooooooooooo ……. Your mind is probably spinning at the moment as you swallow this bitter pill. The bitter pill is going to taste even worse once you realize that the benchmark tracks the performance professional traders. Each of these traders probably have a university degree in finance, passed their CTA exams and have many years of experience under their belt. They also have access to other knowledgeable traders, teams of experienced analysts and are supported by independent risk managers. In contrast to a beginner on a forum, this is like comparing someone who has been playing golf for a few months to a professional golfer with years of experience on the circuit. There is just a world of difference. Beating the Benchmark Ok, so you are probably asking yourself how is that some traders on the forums are able to claim astounding returns, some with more than a 1000% in a month? Or how guys who win trading competitions return 1000% in a year. Or how some of these supposed “old hands” are pulling in a 100% a year. Or how Alexander Elder even pulls in a mere 30% a year. Well, if we exclude the traders that are lying about their performance, there are a number of factors at play. The first factor clearly is knowledge. If you look very carefully at the postings of individuals producing abnormal returns, you realize that these guys are not your garden-variety retail trader. The nuances behind some of the things in their postings indicate a degree of knowledge equal to that of a professional trader. This goes beyond just arguing about what is the best indicator. Much of their ability comes from an intuition built up by trading a range of markets for a number of years. The second factor is leverage. Most of the funds in the Barclay’s index are trading with a 1:1, 2:1 or at most 4:1 leverage. The guys who pull in the big wins in the forums or the competitions are trading using 10:1, 50:1 or in some cases 200:1 leverage. The third factor is trading the right system for the market conditions. If the system is right for the market conditions, then it has a good chance of producing the winning trades. The last factor is luck. An experienced trader, using ridiculous amounts of leverage and the right system for the market, if they are lucky, can get a string of winning trades and produce the stratospheric results that our beginner initially dreamed of. However, with a bit of bad luck and a string of losses, there is a good chance that they will blow their account or at least put a serious dent in it. Trying to beat the benchmark does nothing more than increase the volatility of returns. This is no different from a pro golfer adjusting their golfing style to be more aggressive, avoiding the safe shots and playing for the hole in ones. There is a chance they will win the tournament by a good margin, but there is a huge risk of coming last by an embarrassingly huge margin. Traders who are trying to win competitions and get the 1000% returns are highly likely to send their account up in flames, but there is a chance they might win big as well. Similarly, I don’t doubt that a number of the old hand retail traders hit their 100% annual return targets, but all too often you hear of the story of the “old hand” trader blowing up three quarters their account and they are left licking their wounds. Lastly, the guys who are aiming for the 30% a year hit their target quite frequently, but there are enough of Alexander Elder’s students who have lost a third of their account or more, to know that their trading results are far from perfect. If you wondering why the funds are only pulling in 10% a year, whereas the traders on the forums are doing 30 to 100% a year, it has everything to do with independent risk management. The risk manager’s role is to stop their clients from loosing great wads of cash as an overly ambitious trader tries to reach for the stars like the traders on the forums.