The Rate of Return Dilemma - As I've received several questions lately related to Rate of Return -- including in comments to yesterday's January summary -- I thought I'd try to help clarify my views on the topic.
Imagine you were a professional poker player with roughly $2.5 Million in "available" bankroll, and had to decide each day how much of those funds to allocate to the game to earn your daily keep. Essentially you have three choices: (1) Bring all of it and put it all in play and at risk (assuming the house rules would allow you to); (2) Bring all of it, yet only place a portion on the table and keep the rest in reserve; or (3) Bring and play with only a part of it.
Then let's assume you varied your allocation over the course of a year, depending on a combination of varying table regulations, perceived table conditions, and simple personal preference.
Then assume you earned $1.0M over the course of a year, and then someone asks you what rate of return you earned as the result of your poker playing. What is the correct answer?
A. 40%
B. 200%
C. 1000%
D. Possibly any of the above.
Some might quickly respond "A" ($1.0M / $2.5M). My answer on the other hand -- without hesitation -- would be D, which helps explain why I think Rate of Return is often completely irrelevant and abused when it comes to analyzing performance, and is why many poker and independent trading pros don't track it. The plot thickens for tournament situations where a player buying into a satellite tourney for $100 ends up winning $2.0 Million. What was his ROR?
And while I realize that such a benchmark can help compare fund and manager performance in the public sector, and even used it as a "fun" personal benchmark during the 2008 race just to see what I could do, it remains largely off my radar in terms of personal goals and performance because of the complexities noted above.
Essentially, I'd define allocation of my trading capital as similar to #2 and #3 above. And while I used the conservative industry definition of #1 above (net profit divided by total account capital) in benchmarking against CTA funds last year, some could argue the figure was actually understated since I usually employed strategy #3 throughout the year, trading only a modest portion of the of the accumulated capital as I never really increased betting size during the time.
Such is why like many independent "trade for ourselves" traders, I'm really only interested in one number: Net Income. It's simple and clear. Or said another way, I view trading income as a salary. Raw dollars.
2009 Goal - OK, it's set. And it remains similar to last year, with one twist in that instead of looking solely at Jan-Dec 2009, I'm going to also continually track my most recent 12-month performance. And both goals will be set at $1.2 Million, which reflects a slight increase over the initial $1.0 Million 2008 goal, while also allowing for downtime as the result of non-market and personal priorities and obligations. It also results in a nice round number of $100K/month, which so long as I hover around there, will tell me I'm on track without having to focus on distracting analyses.
Like anything, it's subject to revision up or down (the beauty of trading for ourselves ... we get to make up all the rules), but that's where my head is currently at.
Sure, I could be Archie Karas or Stu Ungar and put it all at risk (Option 1 above). But I'm not going there. I'll be 48 in a little over a month and want to balance pushing and motivating myself with enjoying the prime years of my life.
And if I miss the goal and "only" earn $750K? You certainly won't find me jumping off any bridges.
Personal Requests - I've received a few comments recently asking me if I'd be willing to enter into a coaching/mentoring or money management arrangement, which I purposely haven't posted (some have asked the comments to remain private).
My general response remains that I don't have any current plans to go back into formal coaching, and I'll likely never trade anything except my own capital as I'm most comfortable having manager and client in the same body since "both" know each others style and tolerance for risk very well.
Blog Evolution - Having said that, I haven't given up on further enhancing this continuing blog effort in a big way. Those that know me know I'm always looking to do something that's never been done before (call me a maverick) and challenging the status quo and industry hype. Chatrooms and advisory services are all but dead, and there's something out there that remains untapped.
And while I still haven't put my fingers the next evolutionary step, I firmly believe we can grow this network in a way that will knock each other's socks off and continue to serve the collective good. And this is where I could use your input.
One of the things I'm seriously considering is hosting a live roundtable session on a weekend in the Northeast should there be sufficient interest, as well as establishing a small ongoing trader support group in the Boston area. If there's enough interest, I'll consider it, but I'd want to keep it under the radar and non-commercial. Maybe we'd even play some poker.
Online blogs and chats are great, but like poker, there's something to be said for sitting around the fire in person talking shop. I'm also still considering resurrecting the online after hours PalTalk lounge.
As always, comments/ideas/input are welcome.
Enjoy the weekend.
Imagine you were a professional poker player with roughly $2.5 Million in "available" bankroll, and had to decide each day how much of those funds to allocate to the game to earn your daily keep. Essentially you have three choices: (1) Bring all of it and put it all in play and at risk (assuming the house rules would allow you to); (2) Bring all of it, yet only place a portion on the table and keep the rest in reserve; or (3) Bring and play with only a part of it.
Then let's assume you varied your allocation over the course of a year, depending on a combination of varying table regulations, perceived table conditions, and simple personal preference.
Then assume you earned $1.0M over the course of a year, and then someone asks you what rate of return you earned as the result of your poker playing. What is the correct answer?
A. 40%
B. 200%
C. 1000%
D. Possibly any of the above.
Some might quickly respond "A" ($1.0M / $2.5M). My answer on the other hand -- without hesitation -- would be D, which helps explain why I think Rate of Return is often completely irrelevant and abused when it comes to analyzing performance, and is why many poker and independent trading pros don't track it. The plot thickens for tournament situations where a player buying into a satellite tourney for $100 ends up winning $2.0 Million. What was his ROR?
And while I realize that such a benchmark can help compare fund and manager performance in the public sector, and even used it as a "fun" personal benchmark during the 2008 race just to see what I could do, it remains largely off my radar in terms of personal goals and performance because of the complexities noted above.
Essentially, I'd define allocation of my trading capital as similar to #2 and #3 above. And while I used the conservative industry definition of #1 above (net profit divided by total account capital) in benchmarking against CTA funds last year, some could argue the figure was actually understated since I usually employed strategy #3 throughout the year, trading only a modest portion of the of the accumulated capital as I never really increased betting size during the time.
Such is why like many independent "trade for ourselves" traders, I'm really only interested in one number: Net Income. It's simple and clear. Or said another way, I view trading income as a salary. Raw dollars.
2009 Goal - OK, it's set. And it remains similar to last year, with one twist in that instead of looking solely at Jan-Dec 2009, I'm going to also continually track my most recent 12-month performance. And both goals will be set at $1.2 Million, which reflects a slight increase over the initial $1.0 Million 2008 goal, while also allowing for downtime as the result of non-market and personal priorities and obligations. It also results in a nice round number of $100K/month, which so long as I hover around there, will tell me I'm on track without having to focus on distracting analyses.Like anything, it's subject to revision up or down (the beauty of trading for ourselves ... we get to make up all the rules), but that's where my head is currently at.
Sure, I could be Archie Karas or Stu Ungar and put it all at risk (Option 1 above). But I'm not going there. I'll be 48 in a little over a month and want to balance pushing and motivating myself with enjoying the prime years of my life.
And if I miss the goal and "only" earn $750K? You certainly won't find me jumping off any bridges.
Personal Requests - I've received a few comments recently asking me if I'd be willing to enter into a coaching/mentoring or money management arrangement, which I purposely haven't posted (some have asked the comments to remain private).
My general response remains that I don't have any current plans to go back into formal coaching, and I'll likely never trade anything except my own capital as I'm most comfortable having manager and client in the same body since "both" know each others style and tolerance for risk very well.
Blog Evolution - Having said that, I haven't given up on further enhancing this continuing blog effort in a big way. Those that know me know I'm always looking to do something that's never been done before (call me a maverick) and challenging the status quo and industry hype. Chatrooms and advisory services are all but dead, and there's something out there that remains untapped.
And while I still haven't put my fingers the next evolutionary step, I firmly believe we can grow this network in a way that will knock each other's socks off and continue to serve the collective good. And this is where I could use your input.
One of the things I'm seriously considering is hosting a live roundtable session on a weekend in the Northeast should there be sufficient interest, as well as establishing a small ongoing trader support group in the Boston area. If there's enough interest, I'll consider it, but I'd want to keep it under the radar and non-commercial. Maybe we'd even play some poker.
Online blogs and chats are great, but like poker, there's something to be said for sitting around the fire in person talking shop. I'm also still considering resurrecting the online after hours PalTalk lounge.
As always, comments/ideas/input are welcome.
Enjoy the weekend.
Posts
15 comments:
"Maybe we'd even play some poker."
There's the catch ;)
Love your blog, please keep it up!
Best trading,
Jorge
Good one Jorge :-).
We'd probably play for buying the pizza. And the way I've been playing as of late, I'd likely be the one buying.
Don
Hello Don,
Allow me to preference this with the understanding that there is no best or one style, and that each must forge their own way based on several factors, including risk tolerance, size of account, vices, etc. (As stated by you many times)
There are few out there that would be able to duplicate your style mostly because of capital available. (Nor as stated above should they). How much do you think your style would vary if you only had an available account of 50K or 100K to work with?
What percentage of time do you dictate to your dome as opposed to your charts, and
do you have any of your adds or exits programmed. (OCO, OSO, etc.)
Respectfully,
Severino
Hi Sev -
Actually, I don't think my style would change that much ... seriously.
I can say that with confidence because I trade very much today as I did several years ago -- even when I traded stocks -- and simply have honed the approach with simply a modest uptick in size.
Plus, having more capital isn't necessarily an advantage -- and can actually be a disadvantage as many "fallen from grace" traders and card players can attest to. Such is why I constantly try to believe I'm trading with precious little capital preserved after a draw (the ficititious draw concept).
The only benefit I see to more capital is psychological ... i.e. knowing that I'm risking a smaller percentage of my capital as it grows over time. But that's it.
In terms of DOME vs. charts, I have the DOME situated right on top of the charts so I constantly see both simultaneously.
And the timing of your last question is good as I was thinking about capturing my screen for tomorrow's post since many have asked.
Hope that helps.
Don
At the risk of revealing my ignorance...what is DOME?
Also, Don, maybe you could do a blog roll...i would be curious to see who/what you read regularly.
KUTAW(keep up the awesome work)
-charleS
another curiosity...what platform do you use?
Hi Charles -
Check out yesterday's responses for platform, etc.
DOME (or DOM) stands for "Depth of Market Execution" or simply "Depth of Market" where you can see the inside four bid and ask prices.
In terms of market reading, I read two things: Breifing.com for occasional market news during the day (e.g. if I see a unexplained price spike) and the "Trader" and "Striking Price" sections of Barrons weekly Sunday edition.
And while I also check Dr. Brett's site from time to time, that's it as I purposely have no reason to read other people's work as it would risk introducing a new variable into my fixed trading regimen which would be harmful.
Don
Don
Hi Don,
New to the site and I love what I've seen thus far! Found it via Dr. Brett's site.
Is there anywhere on your site that you give an overview of how you trade, i.e., setups you look for, indicators used etc.?
Also, have you considered posting videos of live trades using something like Camtasia?
Thx for all your hard work.
M
Hi Don,
I would really be interested in trader round table (and maybe even poker) group if you should start one. I am in the Worcester area, so not too far from Boston.
I read all of your posts eagerly, and think I am getting close to finding "the glove that fits me" if you will, with my trading and you are helping me along the way.
I really admire how you are refraining from commercialism in this blog--I think that most traders can get for free here what many others (including me) have spent thousand of dollars for elsewhere. Of course we all have our own path and spending thousands elsewhere might have been the "bad trade" that I had to make to learn from my mistake. It's funny how in life and in trading there is just no avoiding that mistakes must be made, and even celebrated from time to time as each one brings us closer to what success means for us.
Thanks again,
Mike
Hi Monique and welcome to the blog.
The methods on how I trade are likely sprinkled throughout the hundreds of diary posts, but I'll touch on it a bit in today's (Sunday's) post.
In terms of live recording, I did that a few years ago when I was providing trader tools (I actually recorded a full unedited 3-day live session complete with notes), but right now am primarily summarizing my day's trade at the end of the day in the blog. [Please keep in mind I'm not teaching here ... simply documenting my thoughts.]
If you search the blog though, you'll find a couple of days where I narrate "live" via timestamps what I'm doing or thinking, and you should get a feel for how I trade. There's also an "Anatomy of a Scalper" post in January that shows a documented chart of one particular day.
Don
Don,
I'm in Rhode Island (about 20 mins. from Foxwoods) and would participate in a trader round table if invited.
James
I was playing poker the other day 25/50 NL Hold'um, sat down. I'm dealt AcKc on my first hand. Every one posts so I raise to 100 and the dealer with the big stack (he's got 6/1 chip lead over everybody) goes all in. What should I do? My gut says fold, I play very tight ussualy, my head says I've got the better odds and he's trying to bully the new guy with his stack. What is the correct play?
Well I go all-in and he throws down pocket 7's, and I'm feeling pretty good...until he flops another 7. Just to twist the knife the river?...another 7. QUADS--unbelievable.
My biggest problem trading is keeping my head in the game. I've had this concept of overtrading drilled in my head so long that I tend to make one or two trades a day and close the charts. But I've been entirely flat equity wise, no gains, no drawdowns. What do you do specifically waiting for the next setup?
Ouch Frankie!
In terms of what I do while waiting for setups, I often focus on my non-market obligations and/or provide light liquidity as a market maker to keep my head in the game.
Don
Don,
I would be very interested in the Boston trader support group. I live in Newton and trade from home and would love to get together with others in the area to talk shop as there is not much opportunity to do so with myself! :-) I am not a bad poker player either. Please let me know if this gets going.
No need to post this on the blog, just wanted to let you know of my strong interest. Thanks!!
- Mark
Frankie Gamwell:
"I was playing poker the other day 25/50 NL Hold'um, sat down. I'm dealt AcKc on my first hand. Every one posts so I raise to 100 and the dealer with the big stack (he's got 6/1 chip lead over everybody) goes all in. What should I do?"
The first thing you should do is make a bigger raise. You're not playing limit, you're playing no limit. So when "everyone posts" (I trust you mean they limped in), you should have raised three times the big blind PLUS one big blind for everyone who limped.
The point of raising is to drive people out of the hand and create dead money in the post. If the dealer just calls instead of shoving, you've priced everyone else in for a call as well and the value of AKs drops drastically. (Unless you flop trips or a four-flush, but that's results-oriented thinking.)
The dealer almost surely has a pair, so your AKs is either a little behind (against QQ or worse), a lot behind (against KK), or completely crushed against AA.
One final point--when you're playing a cash game (as opposed to a tournament), nobody has a chip lead, there are just different size stacks. This is relevant because there is no time pressure on you with ever-increasing blinds. Don't play cash games like tournaments and vice versa.
Of course, if you're just looking to gamble and are willing to accept -EV for the action, ignore everything I said above.
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