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The thread got me thinking and I wanted to discuss this.
In a recent interview with Lance Breitstein, who is a verified $10M+ annually trader for at least two consecutive years recently, he affirmed that simply beating market returns would be effectively laughable for traders at the firm he came up in. Their goal was not to beat the market - it was to gain outsized returns.
In the case of prop traders like that, they're not even really thinking in terms of "account %". They get a risk limit per day/week, and they make money with that much risk. There's really not a concept of "account size". The firm will not lose more than $X of course, and that amount may be something like $100K or $200K total. But, once they are rolling along, they simply think in terms of "how much profit have I made, given my risk parameters?"
Which brings me to the key point: what is account size, anyway? It really becomes a question of "how much of my liquid net worth will I risk?" If you have $50k in cash and fund a $5k account and double it, but you would have refunded with another $5k when you lost, have you really "doubled" your account? Well, not really.
It's more useful IMO to think of the account size as establishing sane margin limits and then trading with size safely below those. Let's imagine that on a trade, I set my risk limit to $300, and I trade with max 3 contracts. Well, it doesn't matter whether I have $20,000 or $500,000 in my account, does it? If I trade those 3 contracts and make $500 on a trade, in one case I say I've made 2.5%, and in the other case I've made 0.1%. But who cares? All that matters is that I was willing to lose $300, and that I made $500. So, ultimately, IMO, the only thing that matters is expected value over a series of trades (the expectation based on realized wins and losses). What can I expect to make, or lose, in absolute terms?
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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People do not understand the difference between mean and median. If you do the analysis on Kelly Betting it optimizes "logarithm of wealth". If everybody uses it, almost everybody goes bankrupt. But the one person who makes money, makes so much money it completely overwhelms (the statistics of) everybody who lost money. One person makes a million, one hundred thousand people lose $10. Everybody thinks they are risking $10 and think they will win a million! Everybody is thinking $1,000,000 but the Mean is $10, and the Median is $0!
That's true, these types of comparisons are always lacking crucial information.
Another example: I saw a question in another thread that was like "who can make 200 ticks per month". If you want to compare yourself with others based on the amount of ticks you made, this will lead to the same problem.
Maybe Trader A only aims for the big moves, while Trader B is scalping but uses more contracts to get to the desired risk amount. In the end it could look like Trader A made more ticks, while in reality Trader B made more money with the same account size but with less ticks. Or you can multiply contracts times ticks to try to compare total number of ticks, but then it would look like the trader with the bigger account size (assuming same % risk) would have made more ticks while necessary not being the better trader.
I think I would care. I know it's just an example, but why set the risk limit to a fixed dollar amount? Using the bigger account, I would like to make more from it than 0.1%.
But I think you are absolutely right, using EV is the best choice and unfortunately something that is not often spoken about. Maybe this calls for another poll
I'm a glass half full kind of guy so I appreciate you saying I'm better than something
All I can figure is that perhaps it seems I'm suggesting that the average trader can achieve some profit objective given some small risk. That's not what I'm saying at all. None of what I wrote implies anything about anyone who's "average", because even the 90th percentile trader doesn't make a dime. I'm talking more about the P97 to P99 trader. The 1 out of 30 or 1 out of 90 trader. That's the subset of traders I'm considering here.
I wasn't suggesting doing that, I was first pointing out that $500 is $500, whether it represents 0.1% of some value or 2.5%.
And second, I was highlighting that in the prop firm world (the real prop firms, not funding companies), the focus is not really so much about an "account", but rather what is your daily/weekly risk limit, and how much do you pull in profits. The firm has a big capital base, and it's like a big pool of money. You, and other traders, are trading the firm's capital, not yours, and it comes from one big pool. They say, "how much are we willing to lose when Dmonz trades?" They of course use some percentage of their capital base when they consider this, but the traders there are thinking more in terms of their loss limits, rather than "how much is in my account?" because they don't really have one in the traditional sense like independent retail traders do.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,055 since Dec 2013
Thanks Given: 4,397
Thanks Received: 10,220
Sorry wasn't specifically aiming my comment at you, probably shouldn't have quoted your specific post and called you out. You are right in that you are not advocating for this type of thinking.