The Public Blog site

A correct understanding of “rate-of-return”

The lack of understanding of trading performance is wider than I imagined

On January 29, 2024 I posted on “X” the polling Tweet shown below.

The wording was intended to reveal the faulty understanding of performance by the majority of social media participants.

Faulty indeed!!

81% of the 1,553 respondents answered wrong.

The trade produced a 6% rate on capital.

Anyone who monitors Twitter is accustomed to such claims as:

    • “Trade delivered 10x profit”
    • “120% return in one-week”

My response to such claims is always: Bull Crap!

The profit/loss and risk of a trade MUST always be expressed as a percent of the composite value of the entire amount of capital from which the trade was made. In the example of the polling question, the two datum points attributable to performance are:

  1. Investment of $12,000 to purchase 400 shares of XYZ
  2. A profit of $6,000 or $15 per share

The percent change of the underlying asset does NOT represent the rate of return.

The profit as a percent of the margined position does NOT represent the rate of return.

I repeat — the risk AND profit/loss of a trade must be calculated in relationship to the total actual or nominal value of a trading/investment account.

Let me unpack an actual example from the prop account of my company, Factor Trading. For the sake of this argument, assume that my trading account has a total nominal value of $1 million.

On January 9 I shorted seven contracts of May 2024 Soybeans at 12.85. The underlying value of this trade (35,000 bushels) was $449,750. The margin requirement to carry this trade was $28,910 (keep in mind that the CME sets a minimum margin requirement per contract but each FCM can require more).

I covered the trade today at a price of $12.23, or a profit per bushel of 62 cents. So, the total profit of the trade was $21,700.

Based on the answers to the poll (above), 26% of respondents would have pegged the rate of return of this trade at 75% (21,700/28,910) — and this answer would be wrong.

And 42% of respondents would have pegged the rate of return at 4.8% (.62/12.85) — and this also would be wrong.

Repeating once again — rate of return (and risk) must be expressed as a percent of the total account capitalization, so a profit of $28,910 represented a return of 2.9% (or 290 basis points), derived from dividing the profit of $28,910 by the total nominal capitalization of $1,000,000.

To conclude, rate of return should NOT be calculated based on the profit/loss as a percent of the change of the underlying asset or as a percent of the margin used.

Yet follow Twitter in the days ahead and see how many braggard traders misreport the return of their trades.

One final note — if a Commodity Trading Advisor or investment manager were to report performance in any other way than explained, the NFA/CFTC or SEC would severely judge such reporting as misleading and subject to a monetary fine.

End

Obstacles facing Ethereum ETH

While Ethereum has shown significant growth and potential, there are several factors that could potentially hinder its price appreciation in the future. It’s important to understand that the cryptocurrency market is highly volatile and influenced by a wide range of factors, both internal and external to the Ethereum network. Here are some reasons that might work against Ethereum’s price growth:

  1. Technical Challenges: Ethereum faces ongoing technical challenges, including scalability issues. While Ethereum 2.0 aims to address these through sharding and a transition to proof of stake, any delays or problems in this upgrade could negatively impact investor confidence and the price.
  2. Regulatory Risks: Cryptocurrencies are subject to a rapidly evolving regulatory landscape. Increased regulatory scrutiny or unfavorable policies could impact the adoption and price of Ethereum, as governments might impose restrictions on its use or trading.
  3. Competition: The rise of other blockchain platforms that offer similar or improved functionalities, such as Litecoin, Cardano, Solana, and others, could divert developer and user attention away from Ethereum, impacting its market position and price.
  4. Market Sentiment and Speculation: The cryptocurrency market is highly influenced by investor sentiment, which can be fickle. Negative news, market trends, or loss of investor interest could lead to a decrease in Ethereum’s price.
  5. Security Concerns: While Ethereum has a strong security record, the blockchain and its smart contracts are not immune to vulnerabilities. Any significant security breach or successful attack could lead to a loss of trust and a decline in price.
  6. Network Congestion and High Fees: Ethereum has struggled with high transaction fees and network congestion during periods of heavy use. This could push users and developers towards more efficient platforms, affecting Ethereum’s price negatively.
  7. Scaling Solutions and Layer 2 Adoption: The adoption and success of Layer 2 scaling solutions are crucial for Ethereum. If these solutions fail to deliver as expected, or if there’s slow adoption, it could negatively impact Ethereum’s usability and value.
  8. Environmental Concerns: The environmental impact of blockchain technology and crypto mining has become a significant concern. Ethereum’s shift to proof of stake aims to address this, but any perception that it’s falling short in environmental responsibility could hurt its price.
  9. Dependence on Decentralized Finance (DeFi) and NFT Markets: A substantial portion of Ethereum’s value is tied to its use in DeFi and NFTs. A downturn in these markets could lead to a decrease in Ethereum’s price.

It’s essential for investors to conduct thorough research and consider the dynamic nature of the cryptocurrency market when evaluating potential risks and rewards.

Factor Public Webinar November 2023 – Market Review and Q&A

Recorded live November 27, 2023

Overview 

  • Peter’s background and how he trades 00:17
  • Charts on the radar screen 11:45
  • Q&A 26:15

Live questions from Members  

  1. You have a long-standing stance that Bitcoin has a 50% chance of continuing to increase in value and a 50% chance of going to zero…based on that, in what instance (or instances) would you see Bitcoin going to zero, and if that were the case, how fast could such an event happen? (i.e. zero overnight or would it take more time)? 26:15
  2. Which of your four pillars is the most critical and why? 28:03
  3. Are you still only trading weekly charts, or will you trade daily chart patterns as well? 29:40
  4. Any opinion on stock FLR? 30:51
  5. Any idea why did Edwards & Magee become more popular than Schabacker? 32:20
  6. Has this been one of your toughest years performance-wise? 33:50
  7. Are you looking at Forex pairs as closely as Futures contracts when you are charting and looking for potential positions? 35:57
  8. Do you trade altcoins too? Are you taking chart requests for altcoins? 37:44
  9. How do you decide where to set your stop when you enter a new position? 38:44
  10. In the FLR chart, do such patterns mean retesting the recent lows successfully by making a new Higher High again and again to break out? 43:33
  11. Using technical methods, what are good books for day/swing trading? 45:02
  12. Do you follow only Robusta or KC futures as well? 46:00
  13. In order of your top 3 or 4 preferences, what are your favorite patterns? 47:41
  14. Do you take the continuation pattern or the pattern of the contract month? 51:37

Link to Peter’s recommended reading list on Amazon 

>>>CLICK HERE to watch<<<


Become a Factor Member

Members receive:

  • Trading Commodity Futures with Classical Chart Patterns: A free PDF copy of Peter’s classic out-of-print book
  • The Weekend: Thoughts on a Sunday (Weekend) Afternoon
  • Private Twitter Page: Real-time alerts on interesting charts and observations, member dialog, the process of trading, the human aspect of trading, and risk/trade management
  • Webinars: Periodic member-only webinars where Peter speaks about current conditions and fields member questions
  • Knowledge Center: Fast and easy access to current and archived content from Peter’s extensive library of trading content
  • Automatic notifications: Email and social media notifications are sent out when new content is published
  • Factor Report Educational Papers: Periodic educational and instructional documents

View your Factor Member options here. You could consider your membership in the Factor Service as just one more trade. If the Factor Service is not of value to you, well, it is just one more trade that did not work. My goal is to shoot straight on what trading is all about.

I hope you will consider joining the Factor community.

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Factor Update | October 28, 2023

Factor Update | October 28, 2023

The below Factor Update was issued to Factor Members on October 28, 2023.

Enjoy!


Become a Factor Member

Members receive:

  • Trading Commodity Futures with Classical Chart Patterns: A free PDF copy of Peter’s classic out-of-print book
  • The Weekend: Thoughts on a Sunday (Weekend) Afternoon / Factor Update
  • Private Twitter Page: Real-time alerts on interesting charts and observations, member dialog, the process of trading, the human aspect of trading, and risk/trade management
  • Webinars: Periodic member-only webinars where Peter speaks about current conditions and fields member questions
  • Knowledge Center: Fast and easy access to current and archived content from Peter’s extensive library of trading content
  • Automatic notifications: Email and social media notifications are sent out when new content is published
  • Factor Report Educational Papers: Periodic educational and instructional documents

View your Factor Member options here. You could consider your membership in the Factor Service as just one more trade. If the Factor Service is not of value to you, well, it is just one more trade that did not work. My goal is to shoot straight on what trading is all about.

I hope you will consider joining the Factor community.

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Factor Featured Trade DAX

Issued to Factor Members on September 24, 2023

Trade Spotlight – Short DAX Index

The spot DAX displays a right angled broadening triangle with a horizontal lower boundary at 15450 and with a 30-day ATR of 161 points. The continuation chart (056) appears as a broadening triangle. The Dec futures contract shows a right angled broadening triangle with a slanted lower boundary. The large futures contract has a point value of €5, the mini-contract has a value of €1 per point. I will use an alert from the spot chart as my trigger.

Constructing the initial trade

There are two possible risk point levels on a short trade in the Dec contract:

  • Above the Sep 22 high at 15735
  • Above the Sep 21 high at 15847

page2image50021600

Spot DAX closed 252 points above its ATR BO at 15295. But the spot DAX closed several hours prior to the close of the DAX futures, which weakened by approximately 50 points after the spot close. Making the appropriate adjustments, I believe the ATR breakout for the Dec contract is sub 15500 (call it 15489).

page2image50027424

A risk from a short trade entry at 15489 to 15853 (above Sep 21 high) would be 364 points, or €1820 (around $1,940 or so). Thus, a three large contract (or 15 mini contract) trade would create a risk of just under 60 basis points (6/10th of 1% of total nominal capital).

The orders below reflect the trade. The first order is the entry stop (with a limit).

page2image50022848

The attached order is also entered, reflecting a buy stop which becomes active if/when the entry sell stop is triggered.

page2image50025344

Become a Factor Member

Members receive:

  • Trading Commodity Futures with Classical Chart Patterns: A free PDF copy of Peter’s classic out-of-print book
  • The Weekend: Thoughts on a Sunday (Weekend) Afternoon
  • Private Twitter Page: Real-time alerts on interesting charts and observations, member dialog, the process of trading, the human aspect of trading, and risk/trade management
  • Webinars: Periodic member-only webinars where Peter speaks about current conditions and fields member questions
  • Knowledge Center: Fast and easy access to current and archived content from Peter’s extensive library of trading content
  • Automatic notifications: Email and social media notifications are sent out when new content is published
  • Factor Report Educational Papers: Periodic educational and instructional documents

View your Factor Member options here. You could consider your membership in the Factor Service as just one more trade. If the Factor Service is not of value to you, well, it is just one more trade that did not work. My goal is to shoot straight on what trading is all about.

I hope you will consider joining the Factor community.

sig

2023 January FX Effect

Will the Eurocurrency make its high soon for the entire 2023 year? There is a definite chance it might. Read here about the powerful tendency for the Eurocurrency to make its top or bottom in January.

Become a Factor Member

Members receive:

  • Trading Commodity Futures with Classical Chart Patterns: A free PDF copy of Peter’s classic out-of-print book
  • The Weekend: Thoughts on a Sunday (Weekend) Afternoon
  • The Monthly: Issued monthly, will provide an overview of the completed month and highlighted member content
  • Private Twitter Page: Real-time alerts on interesting charts and observations, member dialog, the process of trading, the human aspect of trading, and risk/trade management (streamed on the member site as well)
  • Webinars: Periodic member-only webinars where Peter speaks about current conditions and fields member questions
  • Knowledge Center: Fast and easy access to current and archived content from Peter’s extensive library of trading content
  • Automatic notifications: Email and social media notifications are sent out when new content is published
  • Factor Report Educational Papers: Periodic educational and instructional documents

View your Factor Member options here. You could consider your membership in the Factor Service as just one more trade. If the Factor Service is not of value to you, well, it is just one more trade that did not work. My goal is to shoot straight on what trading is all about.

I hope you will consider joining the Factor community.

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The Monthly | Blog Edition | Quarter 4 | 2022

A glimpse inside the Factor Member Portal

From the just-completed quarter

October Numbers

  • Tweets posted on our Private Member Twitter: 71
  • Updates and Special Reports posted on the Member site: 7

November Numbers

  • Tweets posted on our Private Member Twitter: 106
  • Updates and Special Reports posted on the Member site: 5

December Numbers

  • Tweets posted on our Private Member Twitter: 104
  • Updates and Special Reports posted on the Member site: 6

Snippets from Thoughts on a Weekend Afternoon

Peter’s thoughts on the finished week and the week ahead | Issued most weekends


Factor Member Private Twitter

Top tweets from the last quarter

 

 

 

 


Recommended Listening

Become a Factor Member

Members receive:

  • Trading Commodity Futures with Classical Chart Patterns: A free PDF copy of Peter’s classic out-of-print book
  • The Weekend: Thoughts on a Sunday (Weekend) Afternoon
  • The Monthly: Issued monthly, will provide an overview of the completed month and highlighted member content
  • Private Twitter Page: Real-time alerts on interesting charts and observations, member dialog, the process of trading, the human aspect of trading, and risk/trade management (streamed on the member site as well)
  • Webinars: Periodic member-only webinars where Peter speaks about current conditions and fields member questions
  • Knowledge Center: Fast and easy access to current and archived content from Peter’s extensive library of trading content
  • Automatic notifications: Email and social media notifications are sent out when new content is published
  • Factor Report Educational Papers: Periodic educational and instructional documents

View your Factor Member options here. You could consider your membership in the Factor Service as just one more trade. If the Factor Service is not of value to you, well, it is just one more trade that did not work. My goal is to shoot straight on what trading is all about.

I hope you will consider joining the Factor community.

sig

Metrics That Matter

On November 2, I posted the following Twitter poll.

In hindsight, I should have included the Sharpe Ratio as one of the answers. As an aside, perhaps I will do another poll someday comparing the Sharpe Ratio to Rate-of-Return, the Gain-to-Pain (GPR) ratio, and the Profit Factor (PF).

I was very pleasantly surprised that the GPR ratio was the top vote-getter because this was the correct answer.

Win-rate (the percent of trades that are winners) was likely the vote of trading newbies. Win-rate is a totally meaningless metric with very little correlation to long-term success (which I define as performance over a five-year period).

I have known traders who are consistently profitable with a 30%-win rate and also individuals who self-destructed with a 70%-win rate. Of much more importance is the average size of wins in relationship to the average size of losses.

Rate-of-return (ROR) received the second greatest number of votes. Again, ROR is a mostly meaningless metric because it does not take into account the asset volatility required to achieve the ROR. Of what benefit is a 50% ROR if, in the process drawdowns of 50% or more are experienced.

So, between ROR and win rate, 46% of the poll participants wasted their vote.

Gain-to-pain ratio (GPR) is the sum of all monthly returns divided by the absolute value of the sum of all monthly losses. In other words, this metric measures the ratio of cumulative net gain to the cumulative loss to achieve that gain. To be a good guide, GPR should be measured over at least three years. A GPR of 1.0 is acceptable, 2.0 is outstanding, 3.0 is excellent and 4.0 is world class. It is a difficult challenge to maintain higher GPRs over more extended time periods. Dating back to 1981, my career GPR was calculated by Jack Schwager (author of the Market Wizards series) at 2.8.

The Calmar ratio is calculated by dividing the average annual ROR over at least three years by the worst drawdown (DD) during the same period. As such, like the GPR, Calmar is a risk-adjusted expression of performance.

The poll did not include two other performance metrics I want to mention – Profit Factor and the Sharpe Ratio.

The Sharpe Ratio seems to be the most relied upon measure of performance in the investment world. I find this strange because I consider the Sharpe Ratio to be mostly useless. The Sharpe Ratio rewards annuity-like performance outcomes with little performance volatility. But more to the point, the Sharpe Ratio penalizes upside performance volatility which is EXACTLY the type of volatility needed for outstanding profitability.

Profit Factor (PF) is actually my favorite performance metric. PF is measured using the performance of each individual trade (as a percent return on total trading capital) rather than a reference to a time period (such as is the case with GPR).

Profit Factor is calculated by dividing the cumulative ROR sum of positive trades over a set period divided by the absolute value of the cumulative ROR sum of losing trades. Because more data points are involved with PR than with GPR, lesser time frames can be revealing. A PF above 0 indicates profitable trading. A PF above 1.0 is acceptably profitable trading, above 2.0 is good, above 3.0 is outstanding, above 4.0 is excellent and above 5.0 is world-class. The Factor LLC’s Prop Account’s PF since 2014 has been 5.4.

I strongly believe that anyone serious about trading needs to maintain certain metrics. Trading is my business – it has been my livelihood for almost 50 years. Business is serious business – and serious business needs to take performance seriously. What would you think if a company in whose stock you own had no idea what is profit margin, gross sales, net profits and return on shareholder equity were for its most recent year? Yet most trades do not have a clue on some of the most important performance metrics, and this is sad.

Performance metrics are obviously back-looking in nature. But importantly, various performance measures can reveal much about the strengths and weaknesses of a trading program, thus allowing for possible improvements.

The Monthly | Blog Edition | August 2022

A glimpse inside the Factor Member Portal

From the just-completed month

August Numbers

  • Tweets posted on our Private Member Twitter: 87
  • Updates and Special Reports posted on the Member site: 6

Snippets from Thoughts on a Weekend Afternoon

Peter’s thoughts on the finished week and the week ahead | Issued most weekends

A short clip from a member webinar –

An excerpt from a 10 page report on DrawDowns – 

Why do drawdowns occur?

Following I discuss two types of Drawdowns:

• Drawdown ending in destruction or disappointment
• Drawdowns within long-term profitability

Drawdown ending in destruction or disappointment
Here is an important point: Technically the concept of “Drawdowns” applies to long-term profitable trading programs because eventual new NAV highs are implied. A trader whose account zig-zags in a downward slope over time or never really gains traction technically does not experience Drawdown per se.

Over the years brokerage houses, regulatory agencies (such as NFA and CFTC) and academic researchers have consistently reported that fewer than 20% of futures and forex traders are profitable after three years. After five years the proportion increases because of survivors’ bias. My guess is that the data for crypto and equity traders are very different. Crypto traders who began prior to 2021 would have much higher success profiles – crypto traders who began since 2021 would be similar to futures and FX traders. Stock traders who are longterm holders have also done well. Short-term stock traders would fall into line with futures/FX traders.  There are many reasons why a trader might never gain traction. I will highlight several.

Absence of a trading plan.

As insane is it sounds, many people who engage in market speculation do so without a conceived organized plan or goal. This applies to the process of identifying a candidate trade, the sizing of
trades, overall risk management and managing individual trades.
Note: There are a very small proportion of traders who do quite well, even from the start, based on instinct and feel rather than rules, but these individuals are a huge exception. How does a person know if he or she is in this group?

Answer: Profitability comes naturally and continually. I am NOT in this category.

Non-commitment to a trading program (lack of conviction). A trader may have most or all the pieces for a successful trading program, including:

• Insightful market analysis
• Trade identification
• Entry process
• Risk and trade management guidelines/rules
• Organized procedures
• Performance reviews
• Process for adopting modifications to plan
• Safeguards to protect plan from emotional swings

But still, traders may have lacked the conviction to go “all-in” following the plan. Self-doubt and second guessing are huge enemies of trading success. A trader who does not follow his or her trading plan does not really have a trading plan.

 


Factor Member Private Twitter

Top Nine Tweets

 

 


Recommended Reading

Contains an affiliate link to our Amazon Store

Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History by Liam Vaughan


Become a Factor Member

Members receive:

  • Trading Commodity Futures with Classical Chart Patterns: A free PDF copy of Peter’s classic out-of-print book
  • The Weekend: Thoughts on a Sunday (Weekend) Afternoon
  • The Monthly: Issued monthly, will provide an overview of the completed month and highlighted member content
  • Private Twitter Page: Real-time alerts on interesting charts and observations, member dialog, the process of trading, the human aspect of trading, and risk/trade management (streamed on the member site as well)
  • Webinars: Periodic member-only webinars where Peter speaks about current conditions and fields member questions
  • Knowledge Center: Fast and easy access to current and archived content from Peter’s extensive library of trading content
  • Automatic notifications: Email and social media notifications are sent out when new content is published
  • Factor Report Educational Papers: Periodic educational and instructional documents

View your Factor Member options here. You could consider your membership in the Factor Service as just one more trade. If the Factor Service is not of value to you, well, it is just one more trade that did not work. My goal is to shoot straight on what trading is all about.

I hope you will consider joining the Factor community.

sig