ES Fun Math Facts

I'm sure everyone is saying here goes Jim again with his math facts rambling. One of the things I like to do when I study a premise is to look at the various implications of what that premise are. For some reason, this is something I think very few people do. In doing this, I get a chance to examine the situation from a different angle, one that is usually lit with the harsh light of reality, given how I do the exam.

Let's look at something I hear all the time: "I only want to get three points per day (net) out of the ES, that's it. I see it move way more than that, and what I am asking for is very realistic." Sure sounds it. I see the ES move sometimes forty points in a day, and even a range day may have many swings of five or six points up and down. In this forum, you mention that you net three points a day and you better duck, because you're going to get blasted, and any 'good' vendor will tell you with an attitude like that, no wonder you're not a success, you're way too pessimistic.

Let's apply my implications approach and see what that shows us. (I'll assume slippage is factored into the net points, and commissions will at first be ignored, and then in 'part II' I'll show another startling math fact when we include them. Keep in mind this is a fictitious example for educational purposes only.) Here's how we do it (I'll show this for the ES, but also give the final numbers for the Russell, for those, like me, that prefer that vehicle). I simply calculate what rate of return this actually is, and see how realistic that sounds, since three points sounds incredibly realistic. Three points at $50 per point on the ES is just $150 per day, per contract (we'll just do one contract for now, since how many contracts has zero effect on the rate of return or the analysis).

Now, let's use the 'conservative' margin I have heard in here of $2,000 per contract (I prefer $10,000 per contract, as explained elsewhere, and most find that crazy). That means the daily rate of return is $150/$2000 = 7.5%. With an average 250 trading days per year, that's an 1875% return per year on the margin. For the Russell it's twice that, or 3750%. This is an uncompounded return, taking out all profits made every day. The compounded return is so astronomical I won't even show it here, in this mock example. Now, is that realistic, in my view? No, not even close. But the vendors are talking eight or ten points, and in here we hear twenty, thirty, and forty, but the implications of three points net is a rate of return on margin that is four times the available daytrader margin (and almost seven times what one place offers) is 1875% yearly return? 3750% on the Russell? Yep. So, three points net is very, very unrealistic to me.

Let's do this by reverse engineering, then. Let's look at Rogue Trader's example of where he feels 100% is realistic. This was discussed in this topic:
Traders, Forums & Unbelievable Claims. Let's say for the sake of argument one may think this may be a figure he or she might want to shoot for in his or her own 'Trading Plan'. What does this trader have to do to achieve that return? Now, grab your chair and hang on, because the answer is going to startle you, likely even if you are a long-term successful trader.

Let's crunch the numbers. 100% return in 250 trading days is 100%/250 = 0.4% per day. Now, with the margin at $2,000, 0.4% of $2,000 = are you ready (you sure?) $8. Yep, if you net $8 per contract in the ES per day you are making 100% return per year on your margin. That's 0.16 point net. In the Russell it is 0.08 points (less than a tenth of a point!!). Sorry, that's the facts. You have to net about 1/6 of an ES point per day to make 100% return on your money, without any compounding, taking out all profits every day. This isn't a Jim-ism, this is just arithmetic. It can't be denied or ignored, it is reality. This is one reason why I emphasize a 'small' edge in various areas of my methodology.

If I told you I had a way to net 0.16 ES points per day you'd probably laugh at me. I look at what the implications of that statement are, and then I evaluate the statement. This shows me just how small an edge really looks like. People think eight or ten point ES trades, and can't think 0.16 points net for the day. But if you get ten points, then lose nine, then get ten, then lose nine on four successive days, your net is 0.50 points per day. Yet people just talk about the ten pointers. Winning trade size and net points are two completely different things.

Now, some are likely saying 'Great example Jim, but commissions play a big role, and you can't ignore them', and others may be saying 'Nah, you catch a ten pointer on the Russell and make $1,000, what does $5 in commissions matter...'. Well, strap yourself in for a trading reality that most never explore, and it is a monster. Let's add commissions to our play example, and see what the implications of that are. If we use a $5 round turn commission, that would be the same as 0.10 points in the ES, and 0.05 points in the Russell, and let's assume three trades per day for this example. So, our figures would become 0.46 points net per day for the ES, and 0.23 points on the Russell. My first impression, commissions don't really change the overall observation that much. To make 100% per year I have to net 0.46 ES points, less than half a point, or 0.23 points in the Russell, less than a quarter point. But don't you see the other implication?

If I am able to net that amount, let's say 0.46 points, I keep 0.16 points, or just under 35% of what I earned. And at 0.46 points, my actual return is 287.5%, but I keep the 100%. In other words, over 65% of my return 'disappeared'. Where did it go? My broker took it with his tiny little nominal $5 round turn commission. I am able to achieve a 287.5% return for the year (in this example), but my broker grabs me in a dark alley with his goon squad and takes about 2/3 of my money? Yep, welcome to reality. And that's with a 287.5% return. And I thought taxes were harsh. Anybody realize this? And if you trade more than the three trades per day, the numbers get worse. I just thought I'd pass on some critical thinking for newbies and experienced traders alike. Maybe now, too, when you hear someone say they net twenty points a day, you can realize that 0.16 points per day is 100% return per year, or with three trades per day and commissions factored in, 0.46 points. And that's a mathematical fact that nothing in the world can change.

This material is from a copyrighted 2008 Kane Trading website article, all rights reserved.
tks..Jim...but why not let a newbie run 1 contract and see what happens...he either gets stopped out at 1 or 2 $100 loss or he makes 25-30 pts...that is $1,250 or $1,500.00. Only 2 outcomes.

Simple. When you enter a trade...its 50% you going to win...meaning profit..that could be 1 pt or 30 pts. Now how do you skew this in your favour. Buffet, Templeton, Lynch, Greenblatt etc...did all this all the time and made 100 of millions of dollars if not billions...So daytrading how do you skew this to your favour? NOt buy buying any courses....stay away.

So when you enter a trade the probability of it reaching the 20-30 pts is like 90%...or 99% of making a 1 or 2 pts. Easy...know time and price...thats all and you will determine the point potential and profit.

Why do course sellers always go on a tangent about winning and math when they selling a course.

Before buying a course...and I aint selling any...ask for their trading statements...dont buy any course it you do not get that. Jim you produced your trading prowess for produced any statements to show how good a trader you are as you selling a course...I don't think so. and if you it here or send me an email......I did not..but then again I'm not selling any courses...I going to be at a hedge fund proving my acumen and you still here debating math. I not interested in selling any a professor or book seller...I'm interested in making real money...

Finally...I would never sell a course because what I know I try to make millions for myself at a hedge fund...not selling a 2 bit course here and rationalize it with mathematics.

Are all the math professor billionaires...most are not if not all...just teaching and course sellers and book writers...ring a bell !!!

Jim instead of selling a course...use your PROWESS TO TRADE FOR A HEDGE FUND AND MAKE MILLIONS OR LOTS OF MONEY...why impress us poor old sods with your wisdom from your course...their is enuf of course zone, daytrading group...jpg....why would a person who was a great trade be on Paltalk.....hmm

That tells the tale...........You here pushing your sorry course...go trade with us hedge funds and make real money...but you won't.

JIm get a hedge fund job and I would challenge you any day...daytrading and position trading the ES, commmodity options, currency options.

When you got the hedge fund job let me know.....Selling your course here..what a joke.

If you want to make real money....keep it simple....

ok...this is my last one more great piece of information that none of the other sods...ruvan...kane..etc...

EST 10:10 above bullish,,,,below bearish....go check the mkt Jan 31, 29, 28...2 of those days...mkt way above 10:10....TIME....and how many pts did it give...this alone is worth tens of thousands of dollars...see how I get my 6/10/20/30 or what ever pts a day.........

Now you want to listen to me or the rest of the course sellers..

If they selling a course...ask for audited statements...or run as fast as you can cause they know nothing.
To Pips2007,

Read Jim's post you loser and try to understand for just 1 sec what the guy is really saying.

Oh and another thing. If you are such the super trader then why don't you post your statements with the 20,000%+ annual rate of return or how about what you actually did the last couple of days. We would love to see how easy trading is for a professional.

Otherwise, just shut up!

My first and last post...
Thanks sunvalley, glad to see another point of view. Now how about some additional thoughts from some of the experienced traders in here? I really think this is eye-opening, and I am hoping for some good discussion. If you are a newbie, what do you think of this information?

The curious thing to me is that what I do, or sell, or don't sell, has absolutely nothing to do with the math described above. If I ran the most successful hedge fund in the world and made multiple billions last year I would have made the exact same post. It is nothing more than the math of trading, and has nothing to do with me at all. Any good high school math student who worked it out could have posted it, even if he never made a trade in his life. Try to focus on what this implies, not on who posted it.
Why is this guy, pips2007, so hung up on selling courses? Sure sounds to me like the typical case of someone who is dying to sell something, anything (maybe a course?), but he just doesn't have anything that people would want ...and this is clearly proven by the content of his posts which is just a bunch of hot air and reminds us all that he's got nothing to (say) give at all.....(and btw. I've got nothing to sell).

Thanks for the post Jim. Good stuff.
I think a lot of people are suckered into trading by a goldrush mentality. Everyone has reasons why they got into it, but in my view the goldrush mentality is the most dangerous one. The way they 've been advertising Forex for example. 400:1 margin and no commissions (yet you pay a hell of a spread). Make 250K in a month and all that crap (you may as well go to Vegas instead and maybe have some fun, too, while you blow all your dough) Real easy to fall into that. The game hasn't changed. It's always been the same. The sharks haven't changed either, they are just smarter in catching the small fish.
What you put on the table here is basic accounting principles imo that can't be ignored whether you are a trader or not. We all have a budget to play with and basic expenses that need to be met. If you spend more than you earned what would be the outcome? I think it's reflected in the national savings rate. It also appears that everyone has been hypnotized to buy, buy, buy and spend more than they have. Why else is it that 70% of national GDP now is consumer spending? My point is that, at least in the US, people are completely ignorant of these basic principles (just my observations). To me it feels like there is no common sense in regards to this.
A lot of people get into trading to make a quick buck. Most fail and the rest that seriously make (or want to make) a profession out of it do (should) take what you have laid out above very seriously. The only factor that counts if one wants to survive as a trader is consistency. If you have one great year and 3 bad years, what's that great year going to do? Likely nothing. If you cook your own books and don't account for it you are only sabotaging yourself.
The one thing I agree with pips on is that the sooner you start looking at the market as a 50/50 deal and how to manage your money around this concept, the sooner you will become profitable. If you can minimize your losses and capitalize on the winners you are making money. This is not a very hard concept to grasp. Nobody should be thinking in terms of daily or hourly averages when it comes to the stock market, it's the overall picture that matters over thousands of trades. I think as a day trader you can grab on average 20 points or more a day if you average it out over the span of a year or so, but you have to realize that some days you might only grab 2 points, other days even lose, but it's the winning trades that compound your capital. I think with a system like I've described it's very realistic to make %100 or even much more on YOUR capital, not just the margin minimums... but it sure as hell isn't easy like some courses make it sound, and it takes years of experience/discipline to manage each and every trade to return such results.

There's one thing I didn't understand in your comment. You seem to differentiate between the margin and 'your capital'. If you have more money in your account than the margin it is 'idle' money, you can't make money on it (except maybe if they pay you interest). You can calculate your rate of return on all money in your account, but it has no mathematical use. By that, I mean your actual rate of return was higher, and then you diluted it down by the idle amount.

Unless this is done specifically to deleverage, like when I suggest using $10,000 per contract, and then it isn't idle, it is part of the amount set aside for that trade. But if one has say $20,000 in their account and they trade one mini and accept the margin amount as $2,000 (in other words, they might trade up to ten contracts if they wanted to at a given time, but they just haven't yet), if they earn $20,000 for the year their rate of return isn't 100%, it's 1,000% on money 'invested'.

It sounds like your rate of return is actually a lot higher than 100% per year, the way you worded that. Here's what I would like to know from you, if possible, since you have a track record for three years, and it seems as though you don't really think your average 'net' is as low as what I say above. Can you give us an example of how many points you made on the year total per contract, and how many trades that was? I'm also curious to know how you calculated the approximate 100% return, was this on the margin amount, or all capital in the account, including idle funds? If the latter, how much was idle?

I think this could be a great working example that could really teach a lot if Rogue is willing to participate (so I hope he is).

I'll use my first year as an example. I started with roughly $20,000 trading 1 contract on the YM, but of course as I progressed I added more contracts. By year end I had close to $56,000 or so. I'm rounding numbers because I don't feel like looking back on my statements. So I made approx $36,000 on my $20k. I've maintained that progress for the past 2 years with just more money at risk as time passes.

I would calculate it as %180 on my initial capital, but do it your way if you like. Honestly, I think I can do better, and there is potential for more gains than what I have accomplished with my experience as trader, as I progress I see myself making more. Whether or not these are realistic goals are yet to be determined.
I was hoping you traded the ES so it would fit the above example, but what I really want to know now is, how many trades total was that, about? I'm trying to figure your points average per trade per contract. Some people keep records and can answer that easily and some plug the number from their form into their tax software and have no idea. We can get your points total from the total made, but we need to know, at the least, how many contracts that was, total (or trades, and average number of contracts). Anything you can tell us would be great, as I do have a useful point (I hope), if we could do these calculations, and you are the only person to come forward willing to lay it out and talk real numbers (thanks for that).
Ok, I verified my numbers.

In that year I traded 417 times. A bit less than 2 trades per day. That's pretty much what I average daily now as well. I go for runs, not scalps, and I keep my stops fairly tight, although I manage the parameters depending on the way the market is trading each day.

It appears I traded 2 contracts for a better part of that year so the average contract(s) per trade is approx 1.6 or so.

I'd say it's about 10 ticks per trade average or so? I'll let you do the math as you seem to enjoy it :).

edit - ok I did some math of my own, I'm just curious to see if you'll find the same values.

my stats are as followed:

trading accuracy: 63%
average contracts: 1.6
trades total: 417
average loss per trade : approx 15 ticks

I calculated that to net 36k I had to average 26 YM points per winning trade, that's not including commissions, so a little bit more. I looked back and had plenty of 80 point runs, quite a few 50 etc... so I guess that's what it boils down to. Let's see if you get similar results.
Excellent Trading Rouge !

Thank you for sharing your results

I must admit all this math discussion has raised my curiosity concerning my own recent trading performance...

This Week :
% Win = 42 %
Profit Factor = 3.2
W/L Ratio = 4.46
Jim, Thanks for starting this great topic. Incredible value and sense in here and thanks to everyone for some excellent comments and figures.