Trading Tips

What are your trader performance questions?

For about as long as I’ve been involved in trading, the question of the profitability of traders has been an open one. There have been all kinds of numbers thrown out, like 95% of traders fail. About two years ago, early in my PhD research, I compiled some figures that start to answer the profitability question. I want to take things to a higher level, though, and really dig into the subject in a practical, useful fashion.

To that end I want to ask you something:

What are your questions about trader performance and trading success rates?

Depending on how much material I develop on the subject I will either put it into a book or maybe a series of reports. Either way, my objective will be to finally shine some light on how traders really do in the markets and at least provide some indication of the things that drive performance.

So feel free to leave ideas on things you’d like to see or questions you have answered via comment below, on Facebook, or hit me up on Twitter.

Reader Questions Answered

Looking at Risk and Stops Across Markets

Here’s the core of a note I received from a member of my mailing list a short while back. It speaks to a subject some traders struggle with.

Have been studying trading for several years, traded a bit with various levels of success. Looked hard at Forex, but am now rather taking a liking to E-Minis: reason is risk. I find it relatively easy to limit your risk by catching a move with a tight hard s/l & moving s/l in the E-Mini, but for forex all strategies I normally see require a s/l of 20 – 35 pips. I do not like that at all.

What is your view?

It appears as though this individual is caught up in a faulty perspective. He’s focused on points (or pips) rather than what they represent.

In an S&P 500 e-mini contract a single point is worth $50, with the minimum price change of 0.25 being equal to $12.50. By comparisson a 20 pip move in the forex market could represent any number of possible values. Taking EUR/USD as an example, if we are trading a micro contract (1000 EUR) it would be $2.00. For a mini contract (10,000 EUR) it would move up to $20. When we get up to a full lot (100k EUR) it reaches $200.

In other words, depending on the size of your position, a 20-35 pip forex trade risk could be substantially smaller than the smallest possible movement in the e-mini contract. If the trader above is risking 2 points on his e-mini trades (for example), which is $100, then he could trade 5 mini EUR/USD contracts risking 20 pips  and have exactly the same exposure.

You shouldn’t compare markets on point/pip a basis. Focus instead on a value basis, especially a % of portfolio one.