There’s nothing wrong with dreaming in our industry, so long as those dreams are realistic. After all, if we weren’t extremely ambitious in relation to our trading then we’d need to quickly find another profession, or hobby. But how do we temper those ambitions in order to set realistic targets and dreams that reaching for won’t result in terminal damage to our account, or our psyche? How do we manage our expectations to ensure that we don’t commit one of the ultimate of trading ‘crimes’ – overtrading?
In this article we’re going to discuss how setting a realistic, but still highly ambitious target for our trading, can not only focus our energy in the right direction, but also ensure that our trading plan is not violated and that the 3 Ms of our overall strategy; our mental fortitude, our method and money-management are continually observed and deferred to…
What is a realistic, but highly ambitious target for trading FX?
There’s been a raft of hedge fund firms publishing their returns of late. One which caught the eye was Robert Paulson’s. After steep losses in 2011 and 2012, the $21 billion Paulson & Co. was named hedge fund firm of the year at the 2013 Absolute Return Awards in New York City last Tuesday night.
Two separate Paulson funds; Recovery and International, also won best in their respective categories at the annual event hosted by the industry news and data service of HedgeFund Intelligence. The Paulson Recovery fund won the prize for best event-driven vehicle with a 2013 net gain of 65.11 percent and a Sharpe score of 4.44.
Paulson’s International fund was named best arbitrage and convertible offering with a gain of 15.83 percent and a Sharpe of 3.64 in 2013. Sharpe scores measure performance on a risk-adjusted basis. The higher the score, the lower the risk compared to, for example, a virtually risk-free U.S. Treasury bill.
Why are we publishing this data on Paulson and Co? Well we’re illustrating it for two, perhaps three reasons. Firstly, it shows how the ‘best of the best’ are fairing in a market which has proven very lucrative for buy and hold strategists over recent years as the equity markets have experienced parabolic rises in 2013 in particular. Secondly, we can clearly see the profit made and thirdly we have to take on board the fact the Paulson & Co suffered some desperate years after ‘ripping up’ the market with some outstanding punts based on the USA mortgage market collapsing in 2007/2008, they’re far from perfect as a firm.
The return of 65.11% is an outstanding performance, but it must be taken on board that this return from Paulson may also include the usual 20-20 performance and management fee conditions for investors. Paulson may have already taken out up to 40% of fees. Or, even worse and perhaps the more likely scenario, is that the 65.11% might be before the allocation of fees making the return a modest 25.11%. There’s a straightforward reason why we’re concentrating on these numbers, at face value if we add back in the 40% fees then we’re looking at an approx. 100% account growth. Or at worse 65% and these are figures (whether at a low range or high range) that many traders could and perhaps should aim for as the realistic and ambitious targets we mentioned earlier in the article.
But perhaps we could go one step further and suggest that a part time trader should aim even lower in their ambition, by as much as half, meaning that part time traders should aim for profits ranging from 20-50% return per year. Now if this sounds like a low aim let’s recall that one of the very best hedge funds ‘only’ and we stress the word “only” returned 65% and the majority of funds don’t ever come anywhere near this figure. So let’s take our lowest figure in our lowest range and suggest that a 20% return on your first foray and investment into the world of FX would in fact represent a very healthy margin. Let’s not forget that banks are paying less than two percent interest on deposits in European and USA banks at the moment therefore at 20% we’d be beating that return by approx. 1000% when comparing 2% to 20%.
What we need to do, when we’re quite new to trading and have just begun to develop an overall winning strategy, is to build on it very carefully, brick by brick. Like many brokers we have the raw data on winners and losers and we can confirm the industry reports that approx 25% of traders make winning trades. Further if you’re making a 20% profit, particularly in your first profitable year, you’re probably in the top three to five percent of traders globally.
Isn’t that a terrific stat. to feel good over and proves just how much disinformation is often claimed and published on many forums and blogs and it’s worth repeating; if we hit a 20% target (as a fairly new trader) we’re right up there in the top five percent of traders globally and here’s the kicker. Those who reach this modest target, through the effective use of a disciplined trading plan, whilst concentrating on sound money management, generally develop skills that stay with them for their trading life ensuring that their good trading habits are permanent and their success is long lasting.
