Does It All Make Sense?
March 15, 2010Some of you reading this have been following Dow Indicator closely for some time, some not so closely, and some not at all yet. Some of you know we went through a drawdown part of last year, 2009. Drawdowns are of course something that ALL trading systems go through, (yes, even the best of the best) and are a necessary part of trading. In any profitable system, they cannot be avoided without a crystal ball.
Drawdowns however, can still be a time to take a good look at a system and make sure all its inputs are fine tuned. Michael Dylan, our Master Trader and founder of Dow Indicator, made some upgrades to the Dow Indicator system in the latter few months of '09 which are proving to be beneficial. There is a fine line between making real improvements, and just making changes during a drawdown which can cause a system to 'jump the tracks' of the statistical train. I'll cover this in more detail further down.
Sometimes the day to day ups and downs in our account balances can blind us from the big picture. This article is meant to help everyone SEE the big picture. One of my greatest desires is to help as many people as I can make it through the ups and downs of high leverage trading (Futures, Forex), and see as many people as possible be consistently profitable. 95% of people lose money. Give or take a few percentage points, that's a long running accurate statistic. And you know what? Many of those people who lose are actually Trading Successful Systems! However, between fear that causes them to sit out and not trade at times with their system, improper money management in conjunction with fear and greed that causes them to whipsaw themselves, or not having a long enough or big enough perspective, they end up losing nonetheless. Having too high of expectations that can cause a trader to 'system jump' and chase performance in other systems is another culprit that often leads to losses.
Whether day trading on one's own, having a managed account or utilizing a Trade Assist type program, most people lose over time due to the reasons shared above. To date however, most Dow Indicator subscribers are well in profit! Most people who mess with their systems, or jump systems, or don't use good money management, never ride any type of statistical train! Everything is odds when it comes to random events. Trading is one such 'random event'. If a system for instance has a 65% win-loss ratio, and the wins are usually larger than the losses, then a system will make money. However, if a trader sits out and doesn't take the trades when they are fearful, or when excited, raises their number of contracts traded too high thinking they are invincible, or plays around with the settings on their system such as a day trader will often do thinking that their 'settings' just aren't quite right and that's why they are losing, they will very quickly fall off the statistical train and be like a monkey throwing darts! They might as well just be clicking their mouse at random, but that's how 95% of traders end up trading!
While it was no fun to be in the drawdown for part of 2009 with Dow Indicator, the successful trader stayed the course. This is one reason we have monthly conference calls and are very accessible by both phone and e-mail. We know that emotions and belief in a system can wane during drawdowns, and we want to be here to help you however we can, whenever we can, and in whatever way you choose.
Let's take a look at our track record only since Mirus Futures starting tracking our results in their Trade Assist program. There are unfortunately many companies in this industry that either outright falsify things, or, through tricky language or stats that don't show commissions, make their results look better than they are. While our own stats go back further, I'm going to only use our 3rd party verified results from our live trading. So, here we go. Let's first look at trading the YM, or Dow e-mini futures with Dow Indicator. Further down we will look at the more impressive ES, or e-mini S&P. Here is the official track record on Mirus's website -
http://www.mirusfutures.com/brokerage_services/trade_assist/dow_indicator/e_mini_performance#
Notice first that the track record started in Feb. '08. While many people who joined us at that time started with a $10,000 account size, volatility picked up later in the year and Dow Indicator in conjunction with Mirus Futures decided to only allow new accounts to trade that started with $15,000. Therefore, I'm going to always use $15,000 as a starting account size in examples. Using $10,000 would make our percentages look better, but we are more concerned with what really happened for the majority of our members, not what a minority may have achieved. We'd rather always try to under promise and over deliver whenever possible.
In the first full year of trading in Mirus's Trade Assist, and after all commissions, the return on a $15,000 account was 95%. $14,275.26. Stellar! Amazing! It really is. Our subscribers who started with us at the beginning, stayed with us, and stayed totally passive (didn't do anything) actually achieved this gain. After all commissions included, this figure is rarely seen in trading. Correction... unfortunately, it's seen more than it should be. Why? Again, some companies through tricky language, and/or using hypothetical results, or other misleading language leading one to believe that commissions are included when they are not, will sometimes show returns like this. Rarely are these returns EVER TRULY seen in trading. By the way, our results were WITHOUT any compounding. Why don't I make the figures look even more impressive through showing the effects of compounding? Here's why - I don't like to show the effect of compounding since it's a double edged sword, and often too emotionally difficult for traders to really follow through with. It's where whipsawing through improper money management can really rear its ugly head! So, I prefer to look at what's really emotionally achievable by the average trader who utilizes our service. 95% our first 3rd party verified year. So far so good, right? Now let's go on to our 2nd year... Refer again to the link...
http://www.mirusfutures.com/brokerage_services/trade_assist/dow_indicator/e_mini_performance#
It shows that in our 2nd year the Dow Indicator system lost $4,281 including commissions. That's a 28% loss based on a $15,000 account. A Drawdown! It's tough isn't it? We know it is. We are traders. Our own accounts have suffered too. But...
Let's look at the bigger picture. The link also shows that the net Profit and Loss over the entire first 2 years was $9,972 including all commissions. This then is a net gain of 66%, based once again on our $15,000 starting account size. 66% over 2 years. That's 33% a YEAR! (Keep reading below to see this percentage gain changed again to help with the big picture) This figure excites the 5% of Futures traders that are consistently profitable, the ones who are MAKING MONEY. Interestingly though, it often DOES NOT excite the 95% of traders that consistently LOSE over time. (Since Dow Indicator can be traded passively with Mirus Futures Trade Assist program, these numbers above also should excite many mutual fund traders too who passively have LOST money during this same time period! More on this below.)
This brings me to another point I want to share. From my vantage point of customer service and talking to thousands of traders over the last few years, I've found that far too often people come into trading with way too high of expectations. They often think that they can, (and want to) get rich overnight. They might have taken some time off work and decided if they can replace their incomes, they can be one of those cool 'traders' who makes all the money they want, whenever they want to. Or they can show their boss who's the real BOSS, and never go back to work! Or, they can brag to their friends about their returns. These desires are often rooted in wanting to use trading as a means to assuage an emptiness inside themselves often incurred during childhood. This however is another topic that's covered in more detail on our home page under a link titled 'Special Reports', and is not something I want to cover in this article. Big numbers ARE possible folks, but rarely sustainable, and rarely are achieved in the first place. Above average consistent results are what should be strived for in trading! Let's put things in perspective. When was the last time you got an average of 33% a year on your money passively? (By the way, don't forget about the 'rule of 72' as explained at the below link.)
http://www.investopedia.com/ask/answers/04/040104.asp
Certainly not in a mutual fund. In fact, over roughly the last 3 years, the average mutual fund has lost around 9%. That's -9%. One more time, that's MINUS 9%. Not with almost all day trading either. In fact, let's look at some numbers, shall we? (Remember we are still going to be looking at the e-mini S&P numbers further down.)
Most day trading systems on the market cost anywhere from $100 a month to over $300 a month. Let's use $150 a month for this upcoming example. First, as a day trader, you often commit most of your day to trading, thus eliminating most other forms of profit making activities. But let's not count that. (But also not forget it!)
Let's add up what it costs per month before even one trade is taken, and then what the average person spends on commissions each month also in a day trading system. $150 a month for the system cost, and then around an industry average of about $100 dollars a month for a charting platform, order entry screen, and live data feed charges. So, before your first trade, you are spending in this example, $250 dollars each month. Now let's assume that your system has you take 5 day trades a day. Many have you take more, some less. (Of course, this is if you follow your system!) It's been my experience, (again from talking to thousands of traders over the last few years), that since most can't follow a system and end up taking 'revenge' trades or just simply overtrading, that many take more than 5 a day. However, let's just use that number for this example. Now often people take 1 day a week and don't trade due to other commitments or fear of more loss, so let's be even more conservative and base a trading week on 4 days. Therefore, that's 20 trades a week, or 80 trades a month. Using a low commission cost of $5.00 a round turn per contract, that works out to be $400 a month for commission costs. Adding that to the $250 dollars, the total fixed costs to trade per month in this example total $650. Now, with day trading, the most widely used starting account size tends to be anywhere from $5,000 to $10,000. Let's use $10,000 to again be conservative. That means that if a trader breaks even on all their 80 trades for the month (profit and loss on all trades equaling zero) that they are down 6.5%. So, 6.5% has to be made each month just to truly BREAK EVEN!
Now look at Dow Indicator and let's use the numbers from Mirus's site. First of all, with Dow Indicator, none of your time is spent trading, thus you have all your time to pursue other profit making activities. But, like above, let's not figure that in at all. (But again, LET'S NOT FORGET IT!) Dow Indicator costs $150 a month for the service. When utilizing Mirus's Trade Assist Program, there are no charting platforms, order entry screens, or live data feeds to pay for. As seen on Mirus's website, the total commissions charged over 2 years was $623. That equals about $25 a month. So, to trade with Dow Indicator, your total charges each month including commissions have averaged out to be $175 a month.
Now, I know that not everyone aspires to be a day trader, and certain examples and scenarios do not fit everyone, but it's an example that I hope will help everyone take a good look at whatever they are doing in trading and decide if what they are doing really makes sense.
Are you trading with another system that has fixed monthly costs such as Dow Indicator ($150 a month) and has commission costs that average to be $25 a month? If so, after taking all commissions into account, have you averaged at least 33% a year return? Do you have time to pursue other profit making activities, or are you in front of the computer looking for trading opportunities most of each day?
Now, all investments and trading systems have costs, but let's also figure in what the Dow Indicator service cost over the 2 years we are talking about, and then look at the average monthly and yearly return again. After all, the 33% a year average return included commissions, but did not include what Dow Indicator service costs.
The net profit once again over the 2 years was $9,972. Our cost for Dow Indicator at $150 per month over 24 months is a total of $3,600. Subtracting this amount from the $9,972, we get $6,372. This was the profit over 24 months of Dow Indicator with absolutely EVERY cost figured in. That makes a Grand POOBAH total (Sorry, there's that Flintstone's flashback again) of... 1.77% a month, or over 21% a year PASSIVELY! I don't know about you, but when the rubber really hits the road, that number is BIG! Professional traders know this is big! (Plug 21% into the rule of 72 and see what this can do for you.) This isn't a number that some marketing company is throwing around to entice you. This is the most REAL number that I can come up with for everyone. It's what I really want to know when I'm looking at a trading system. In fact, I wish this '3rd party verified ALL costs figured in' way of looking at the performance of systems could be a standard of how all systems are presented and hence judged. Don't be swayed by marketing that throws around big numbers. Again, as mentioned before, big numbers ARE possible, but not sustainable year after year, and rarely achieved by anyone in the first place.
Let's change markets now. We've looked at the Dow e-mini numbers, so let's now look at the e-mini S&P numbers. After all, the e-mini S&P is what we are having all new subscriber/members utilize with our service, so these numbers are most important to potential new subscribers.
http://www.mirusfutures.com/brokerage_services/trade_assist/dow_indicator/e_mini_performance#
$12,278 has been the profit with the e-mini S&P since inception of trading this contract through the date of this article in Mirus's Trade Assist. That's an 81.8% return after all commissions over a period of 21 months. That's averaging 3.9% a month, or around 47% per year annualized. After ALL costs of Dow Indicator service are included, $9,128 was made over those 21 months. ($3,150 for 21 mos. of our service subtracted from $12,278) That's a 60% total return, or 2.9% average per month - 34% annualized per year after ALL costs!
Now, Drawdowns are of concern too, so let's take a quick look at that. Even for members starting our system at the worst possible time, (right in front of a string of losses) none of them had to sit through a drawdown of more than 50% in either the Dow or S&P when starting with our recommended starting account size. I've seen a system or two in my life that has made 75% two years in a row, with a peak to trough drawdown however of over 100%! (Yes, occasionally high returns a couple years in a row are possible) Seriously though, who's going to mentally be able to hang through something like that. And what if it happened right as you joined and it was drawdown of original principal, not of some of your profit too! 50% is tough, but is far, far, far easier to hang in there compared to over 100%. It's hard to imagine anyone actually hanging in a drawdown like that and making the 75% 2 years in a row. And here's some good news - As a result of the improvements made to the Dow Indicator system in the latter part of '09 as mentioned at the beginning of this article, drawdowns have been drastically reduced since. This comes as no surprise to Michael as the changes he made were specifically to address drawdown.
In closing, with whatever system you choose to trade, always look at ALL costs associated with the system. Make sure when looking at monthly/yearly returns, you are looking at numbers that include commissions, are 3rd party verified, and then also figure in what the system costs you. Be honest with yourself. Does it all make sense?
-Joel Friant
