what do you need to become a trader

brainyoga · Post by **brainyoga** » Mon Jun 21, 2004 6:28 am

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LongTheta · Post by **LongTheta** » Mon Jun 21, 2004 6:34 am

I can tell you one thing: Paper trading means [u]nothing[/u]. Trade small, very small, to get the idea that it's very difficult to make money trading. But never paper trade.

Here is another thing: There are no [i]reliable[/i] signals. There are even no signals that are reliable 51% of the time. How much capital do you need to make a reliable 150K per year? If you really know what you're doing, I'd say 1.5M. We are talking year in year out here, right?

brainyoga · Post by **brainyoga** » Mon Jun 21, 2004 7:04 am

I suspected paper trading was misleading. Is it usual practice to back-test a trading strategy before using it? If so then I would think that would be a more reliable process than paper trading.

10% p.a. doesn't sound like a lot. I knew some guys making ~12% per month, consistently over 2 years - have lost touch but that was 2000-2002. Is that way out of norm?

Thanks,

Chigs

LongTheta · Post by **LongTheta** » Mon Jun 21, 2004 7:14 am

I'm not an expert on these things, but my vague impression is that 10% (roughly twice what a bank deposit pays) is a safe estimate for the return of a conservative, long term trading strategy, with minimal risk (whatever that means). What I have in mind is the sort of trading that people would be willing to put their life savings into.

I'm actually interested in this point, and wish to hear what the experts have to say.

FDAXHunter · Post by **FDAXHunter** » Mon Jun 21, 2004 7:21 am

This is a tricky question. Lots and lots of views.

If we define paper trading also as backtesting of strategies/systems, then obviously that's helpful. You shouldn't paper trade, really. If you did your homework in terms of backtesting, then there is no need to paper trade. LongTheta pointed this out already: If you are not sure.. trade with small amounts, but not on paper.

From what you tell me I'm assuming that you are more interested in systematic trading approaches rather than simply "buying it because it looks good"?

If you are more interested in becoming what used to be called a "local", then your objective is not to lose money, rather than make money with the assumption being that the winners will take care of themselves eventually. If you are going for that style of trading, then your capital base need not to be very big, I'd say 150K GBP suffice. Of course, this is can be tricky and certainly isn't everybodies cup of tea. You need a certain psychological profile for this and a certain amount of talent.

If you are more into the systematic way of things (i.e. you don't make the decisions, your system does), then it's different. One problem with being systematic all by yourself is that there can be quite substantial periods of drawdown which you will have to sit through (of course one of the aims of system trading is to avoid these drawdowns as much as possible).

So for that, you will need a larger capital base. Depending on your system: if the system brings you 20% unleveraged and you feel like you can lever it by 2-4 times (who knows, maybe more) around 400K or more (the more the merrier Big Smile ).

12% per month on a systematic basis is only possible if you leverage, I'd say: 25% p.a. unleveraged is 2% a month, if you gear up by a factor of 6 you are at 12%.

There are discretionary traders who can make that sort of return though unleveraged.

What kind of data... hm.. this depends a bit of how you want to trade, of course. If you are trading a large universe of stocks on a daily basis, daily data would suffice, of course. It depends what you are doing.

Given your experience with high-frequency data, it might be worthwhile going down that route to trade. As I said, trading systems can involve quite long periods of drawdowns. One way of reducing the durations of these drawdowns is by increasing the number of trades (with positive expectation, of course Smiley ) Also there aren't that many people with the proper infrastructure or expertise to really be able to claim that they know all about high-frequency, so this is an edge you have and might want to build upon.

If you can't get reliable signals... you are dead and quickly so. Be under no illusion, it's very hard to find a good system that consistently gives good reward/risk ratios.

This is where your edge (or no edge) will be. If you can find/develop something that provides consistent returns, you are all set. If not, you will quickly belong to the 95% that don't make it. Sad

LongTheta · Post by **LongTheta** » Mon Jun 21, 2004 9:43 am

FDAX,

Can anyone actually make 12% per month (even with leverage) [i]systematically[/i]? For how long? How can this happen without taking proportional risks? And if you take proportional risks, how can you achieve that sort of return systematically for a long time?

FDAXHunter · Post by **FDAXHunter** » Mon Jun 21, 2004 10:19 am

For a 12% return you need a system that makes 1% with a fair amount of consistency and leverage 12x. Whether this is achievable over the long-term (what's long term anyway? 5 years? 10 years? 30 years?) is another question.

The only way you are going to be able to get that systematically over a long term period is with a system that has relatively small drawdowns, i.e. liquidity providing systems. A buddy of mine makes around 15% per year through liquidity providing on an unleveraged basis. He doesn't really have drawdowns, so it's easy for him to leverage up signifcantly (20x+). Of course, he's very good at what he does and amongst the top 20 in his market, I guess. The key is drawdowns.

But you are of course right with your sceptisicm over the long term. It's unlikely that something like that will last longer than 3-5 years.

LongTheta · Post by **LongTheta** » Mon Jun 21, 2004 10:27 am

When you say "liquidity providing systems", I guess you mean that he's a market maker. Right? I thought even market makers blow up.

At any rate, it's not something that one can simply get into with some capital.

FDAXHunter · Post by **FDAXHunter** » Mon Jun 21, 2004 10:35 am

Yes, exactly. Market makers also blow up but it's usually when they deviate from the core business and don't keep their risk small anymore. A decent market maker that keeps his risk profile low has a very good chance of surviving until he retires.

Well, you don't need that much capital if you are good. Remember: High consistency allows for high leverage.

If you are not working for an institution [i]consistency[/i] is absolutely [i]key[/i]. It won't help much if you have the million dollar trade on if it takes a year for it to manifest itself. Keeping the pipeline flowing is the name of the game then. A bank trader can afford to buy some way OTM EUR/USD calls and wait 18 months for them to maybe show a profit (or not). Somebody who has bills to pay cannot.

brainyoga · Post by **brainyoga** » Mon Jun 21, 2004 10:48 am

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