Realistic profit expectations from a trade ?

[JesseLivermoreII]

I would be very interested to know from you guys what my expectations should be profit-wise from a small spreadbetting account.

If I have e.g. £1000 in my SB account. I risk say 5% per trade max which = £50. What % or £ would be an average / a good/ a great trade return ?

Is this figure related to my equity or my risk ?

Look forward to your views,

many thanks,
Chris

 

[TWI]

With such a small account size you will be betting pennies per point I assume. Making a profit means you are doing extremely well. If you can stay profitable, no matter how small, then all you need to think about is increasing your volume per trade. Trade small and increase your risk as your confidence grows. Only increase size when you are winning NOT when you are losing.
Good Luck.

 

[jonnyy40]

If you're making money spread betting,you'll do well with direct access.congrats

 

[Roberto]

I would be very interested to know from you guys what my expectations should be profit-wise from a small spreadbetting account.

It's no easier or more difficult to make profits from a small SB account than it is with any other method of trading. Your profitability will not be dependent on the trading-medium used but on your edge. If you have a real edge and not too much variability of results, you'll make profits. Otherwise you'll lose your account. It really _is_ as simple as that.

If I have e.g. £1000 in my SB account. I risk say 5% per trade max which = £50.

Well, you are risking 3 - 5 times the amount that a serious trader would risk, so IMHO you are putting the odds very heavily against you. Sorry if this sounds very "negative": that's not my intention at all; just trying to be honest here.

What % or £ would be an average / a good/ a great trade return ?

Sorry; not possible to answer this from the information you've given.

Honestly, £1,000 is a bit small to try anything out with a SB account, because the £1 per point minimum will most likely mean that your position-sizing will be inappropriate from the word go. Why not use a "demo" SB account somewhere, and hold off for the real thing until you've got £2,000? £2,000 with tight stop-losses might be do-able.

 

[JesseLivermoreII]

Thanks for you responses guys. Your experience is invaluable. Roberto can you say more about position sizing? Is this the same as risk/reward ratio ? With £2000 what would you suggest this be, and expectations of profits be? We seem to be talking 1-2% maximum risk here ? And if I only have £1000 this would mean maximum risk of £10-20. ?? Just want some figures to base calculations on...

What proportions do you guys use: equity vs risk vs reward ? What is your average reward for a trade ?

And THANK YOU for such quick responses. Wishng you profitable days !

Chris

 

[james6848]

Surely the % of capital per point is determined to some extent by what instrument and timescale you are using? For example, if you are daytrading the FTSE 100 you would be looking to earn maybe 10 points per trade, while the potential from the DJIA (for example) would be bigger (with greater losses as well, of course).

Am I missing something here?

 

[Roberto]

Roberto can you say more about position sizing? Is this the same as risk/reward ratio ?

It isn't. I can say a little about each. But most of all, I should encourage you to read either "Trade Your Way to Financial Freedom" by Van K Tharp (first choice) or "Beyond Technical Analysis" by Tushar S. Chande (second choice). I always think that both these authors' names sound like anagrams of something, but since Frugi's on holiday this week, we probably won't find out what. They both explain position-sizing and R/R ratios far better than I can.

Position sizing: maybe an example will clarify - let's say you have £2,000 and want to limit yourself to a maximum of 2% per trade. So you work out that for the trade you're planning, your stop-loss will be 20 points (say) away from your entry and that means your maximum loss on that trade is 20 points, which needs to be not more than £40 (2% of £2,000), so you can just afford a position-size of £2 per point. But if you lose a bit, you'll be in trouble because you can't spread-bet £1.70 or £1.60 or even £1.50 per point: you have to choose between £2 and £1. If you're anything like I was when I started, the reality is that you choose £2 and find that your position-size is inappropriately high for your bank! (You can see from this example why it would be really difficult to do with a starting bank of £1,000 - it's bad enough with £2,000 - and we're working at 2% risk, which is very much on the high side for most styles of trading).

With £2000 what would you suggest this be, and expectations of profits be?

Expectations of profits depends entirely on what your edge is. Let's say you have a system which will make a 30-pip target x% of the time, and it will lose a 20% stop-loss y% of the time. You need to work out how viable it is (30x - 20y), and have a look and see roughly where you'll probably be with it after 100 trades, and then look at how many hours of trading it's probably going to take you to find your set-up appearing 100 times, and all this sort of thing. (Also all explained in those 2 books I mentioned above).

R/R ratios compare only the 30-pip target with the 20-pip stop-loss, without reference to the actual probability of either occurring. That would be a reward:risk ratio of 1.5. That doesn't mean that if you have a 30-pip target you should necessarily have a 20-pip stop-loss! It means that if you had a system that _did_ have a 30-pip target and a 20-pip stop-loss, your R/R ratio would happen to be 1.5.

Stop-losses probably shouldn't be a "fixed number" anyway. They should relate to things like support, resistance and "round numbers"; but that's a different subject altogether.

IMHO people talk a lot of real rubbish about R/R ratios. (Again, that's why I think you're better off reading one of those two books than getting all your information from an internet forum!). I'll give you an example. I have quite a good friend who has been trading a particular fairly mechanically for a long time and has now done over 2,800 trades with it. She makes a living from it. It has a target of 5 pips of profit and a stop-loss of around 12 - 15 pips and 81% of the trades are successful. So this is how you need to work the figures out. Out of every 100 trades, 81 trades make 5 pips (total 405) and 19 trades lose say 15 pips (total only 285) so the system is theoretically viable. That's just where you start from, though. There are a lot of other considerations between "theoretically viable" and "actually tradable", one of which is how long your "longest losing run" is likely to be (and with 81% success-rate it's not too long), what the effect of various numbers of losses will be on your bank-roll and your position-sizing and so on. The reason I'm giving you this example in particular is that it's a real one used by a real trader who's really making a living (and from spread-betting too, as it happens) and just to demonstrate that anyone who tells you flatly that "you must have a reward:risk ratio of at least 1.5", or 2, or whatever, honestly doesn't know what they're talking about.

All of these things are stuff you need to work out and be really, really clear about and have everything tried and tested and proven on "demo" mode, with "fictional money" before you start using your £2,000, so don't let impatience to trade with real money make you rush it.

What proportions do you guys use: equity vs risk vs reward ? What is your average reward for a trade ?

Mine's very complicated to work out, and won't help you much, because I usually close my trades in 3 separate parts, or at least 2 anyway (if you look at the early part of the long thread called "1-2-3-formations and Ross-Hooks" or something like that, you'll see more or less what I'm up to. I trade from Forex charts and use spread-betting only). But I certainly don't ever risk more than 2% of my fund in any one trade (usually quite a bit less), and that's with a success-rate of at least 65% in my case.

I've rambled at great length but I get the impression that I may not necessarily have helped you at all; in which case sorry!

 

[JesseLivermoreII]

Roberto - yes i've read a couple of Van Tharp articles and was thinking of his books recently. Will follow that up as well as your thread suggestion. Your response has been really really helpful and I want to thank you for your time. What we newbies lack is - of course - the voice of experience. And it speaks volumes. Thanks again !!

 

[TheBramble]

Surely the % of capital per point is determined to some extent by what instrument and timescale you are using? For example, if you are daytrading the FTSE 100 you would be looking to earn maybe 10 points per trade, while the potential from the DJIA (for example) would be bigger (with greater losses as well, of course).

Am I missing something here?

Well, that's one way I guess.

If you're going to link your trade size to something to do with the instrument and timescale, work with what you could lose, not win.

Personally (and I could be in a minority here ) I'd suggest you link your max risk per trade to a (very small) percentage of your total trading capital (TTC).

As in, "I have £2000 and I'm willing to risk 1% (£20) on any one trade. What's my stoploss for this trade [plus spread]? That determines my point size"

Worked example:- TTC=£2000. Use 1% of TTC for risk/trade. Total Risk=£20. Stop=10p. Spread=5p. Total Risk=15p. If you're willing to risk 15p/point AND you're willing to risk an absolute amount of £20 for the trade then ---- £20/0.15 = £1.33. Round down (always round DOWN!!!) to £1. So max £1/point.

What!!! That's never going to make me a millionaire by the end of the year.....

 

[JesseLivermoreII]

Roberto, received "Trade Your Way to Financial Freedom" by Van K Tharp, from Amazon today, so I will let you know how I get on. Thanks again for your time, much appreciated,
Chris

 

[Roberto]

Pleased to hear it, well done.; It will tell you plenty about position sizing and all related matters, for sure. "I wish you well to read it" as they say.

 

[sea111]

spread-betting based on Forex charts - please explain your approach

I trade from Forex charts and use spread-betting only

Hi! Your message about Risk - Size - Profit was so impressive! At the end you mentioned one more interesting aspect.
Please, explain how you base your spread-betting on Forex charts. Don't you need a spread-charts?
One more question - Who are your brokers for Forex charts and betting?

Thank you,
sea111

 

[Splitlink]

I would be very interested to know from you guys what my expectations should be profit-wise from a small spreadbetting account.

If I have e.g. £1000 in my SB account. I risk say 5% per trade max which = £50. What % or £ would be an average / a good/ a great trade return ?

Is this figure related to my equity or my risk ?

Look forward to your views,

many thanks,
Chris

As the others say, £50 you are overtrading- you can get a trade for 50p on FS, by the way. which, by using the same stop level, will reduce your risk to £25 or 2.5%. That stop level is OK as a panic button if things go wrong, but be prepared to close as soon as you realise that the trade is going against your plan- that way you can use the money saved to go in again.

A money managing strategy that I use is to learn to be satisfied with a 0.5% profit in the market
if you think that things are going slow and get out. As a beginner, remember, that once your capital has gone then you must stop trading. To make £5 or 5 points, every day, is not easy, some days you will make 20 and your aim must be to learn to keep your losses as low as possible, but if you can make an average of 0.5% daily then your capital will more than double
in a year.

Lots of people are going to tell me that that is very difficult to do- and they are right, but it just shows you what a task you are setting yourself. But if you use too high a percentage then you stand a very serious chance of being badly hurt on a string of losses (and we all have them!).

Split

 

[kriesau]

I would be very interested to know from you guys what my expectations should be profit-wise from a small spreadbetting account.

If I have e.g. £1000 in my SB account. I risk say 5% per trade max which = £50. What % or £ would be an average / a good/ a great trade return ?

Is this figure related to my equity or my risk ?

Look forward to your views,

many thanks,
Chris

I think that there are a number of factors here that you should consider.

1. Strategy - are you going to adopt a swing trade strategy (longer running trades with larger stop losses) or an intraday strategy (effectively short term day trading with specific targets and small stop losses).

2. Orientation - are you comfortable to play both sides of the market (long & short) or are you more comfortable in focusing just upon long or short opportunities.

3. Markets - what market or markets do you plan to trade - indices, equities, forex, commodities etc.

4. Trading - what trading parameters should you use. How often do you plan to trade, what proportion of your bank will you apply to each trade and how many markets will you trade.

5. Money Management: Pay attention to what you are doing and apply discipline to managing your trades within the criteria that you have laid down. Stick rigorously to your planned trading pattern

6. Timeframe - over what timeframe do you expect to measure your return.

I think that these are the fundamentals to consider first (there are many other issues but addressing these 5 will get you started).

A few observations:

Strategy:
Swing or intraday or both ?. First base is how much time do you have to devote to this ? Swing trades are easier to manage on a day to day basis and you can handle this by just monitoring your markets a couple of times a day. Intraday trading requires close monitoring of your chosen markets throughout the the timeframe of your trade. This means that you have to set a specific period of time aside to place your trade, monitor it and close it out.

Orientation:
Psychologically are you more comfortable playing either side of the market or by looking for long or short opportunities.

Markets:
Some markets are more dynamic than others. For instance indices and forex are very volatile (greater opportunities to make and lose money) whilst equities tend to be more stable, long term plays (except where you get surprise profit warnings or some major upheaval that affects the company or sector concerned). If you are going to trade indicies start with at least two so that you don't have all your eggs in one basket and you also get exposure to variable trends.

Trading:
For volatile markets, particularly indicies, once you've decided on your strategy and orientation then your indicated risk level, of around 4% to 5% of your bank, is probably a good starting point . You would have to have 25 or 20 consecutive losing trades to wipe out your bank and if that were to happen then you probably shouldn't continue SB since your ability or the signals that you use to identify trading opportunities are not good enough.

If trading indices then for swing trades start off with stop loss levels of around 1% on the larger markets (Dow, Nikkei etc) and maybe 1.5% - 2% on the smaller volume markets (FTSE, DAX, SPX etc). Trail your stop loss towards your entry point and then past it as the market moves in your favour to lock in profit. Don't expand your stop loss if the market moves against you to keep your position open.

On intraday trades use around 0.2% - 0.25% of the index volume as a stop loss since you are looking for quick in and out trades with a profit target, which will probably based upon a similar % to your stop loss. You might closeout when you've achieved this target or alternatively trail your stop loss up or down to 75% of your target if you feel the market is moving further in your favour and want to speculate on an opportunitic higher return. This will lock in 75% of your target profit if the market suddenly turns against you.

Money Management:
Stick to your planned trading system. Don't vary your stake per trade within the same market even if you have a run of two or three winning trades. Keep trading even if you have a run of two or three losing trades (this can be hard to do sometimes and was a big mistake that I made when first starting out).

Timeframe:
Look at 6 months to a year to gauge your initial return. You can have a run of profitable or losing trades in the shorter term which will distort you perceived performance. I think that an annual basis is best , just like the timeframe one uses to measure most other types of investment.

As you acquire experience (and this can only be acquired by actually trading, not from books or simulations, although you should certainly use one or both of these first before you actually start) then you can refine and finesse your strategy and trading methods. It is critically important that you actually start to trade and experience the reality of the action with the risks of success and failure. You might want to reduce your trades to perhaps 2.5% of your bank for the first two or three months until you feel more comfortable and get used to trading in order to limit any initial losses.

Hope this is useful for you - if you use these boards you'll get good advice from many others here that can help. Nobody is competing with another, we are all competing with the market.

Good luck with your trading !