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?

Yes good point, but the further we zoom out, the less great a 20% annual return looks for active trading. Naz has returned almost exactly 20% per year, compounded annually, over the last 15 years with a pure buy and hold (buy 1200 on Jan 1 2009, hold until today, is 19.5% annually).

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?

If you don't bet, you can't win.

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.

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?

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?

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!

@josh your better than this!

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%.

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.

What did I say which prompted your comment?