A couple of days ago I received an email from a blog reader inquiring about my performance for this year. And often times we are asked during interviews what kind of returns we generate. Almost every day I see on Facebook and some blogs people posting their percentage returns for a particular stock. Individual investors among others judge their performance by their overall percentage return on their portfolio. We as day traders do not use this metric. Let me explain.
As active intraday traders we place many many trades. Personally, on a very volatile day I can put on as many as 250-300 trades. For me to try to add up all the little percentage moves for the different stocks is inefficient. Similarly, for me to talk about the overall percentage return on my account on a daily basis is silly and almost misleading.
In the simplest terms, as a trader for a proprietary firm you ought to have a bankroll. At the end of each trading day whatever net gains/loses you incur get added/deducted to your bankroll. At the end of the month any surplus to your original bankroll is essentially your paycheck. Any losses incurred in that month need to be recouped in the following month before getting paid again. Every trading day you start with the same amount of buying power determined by your level of experience. This amount is independent of your performance from the previous day.
With that said, here is where the math gets silly as I stated earlier. Say trader A has a bankroll of 10k and has 100k of buying power. Now, say that trader A has a very good day and nets 3k in one day—a very reasonable target. Essentially making 30% return on his bank and 3% on his buying power that day. If trader A continues to have a good month and say he/she makes 50k then essentially he/she has made 500% return on his bank and 50% on his buying power. At the end of the month trader A gets his/her check for 50k and his/her numbers get reset for the following month. Put together a few good months in a row and those numbers just look staggering but are they meaningful/relevant?
Thus the most efficient metric to evaluate our performance monthly and yearly is by net P&L. However, one day/week/month performance should not determine our trading career. There are many other things that we use to judge our performance on a day-by-day, week-by-week and month-by-month basis. We are interested in our growth as traders: learning to adapt to the changes in the market, learning to eliminate that which does not work, and further developing our trading skills. Placing too much emphasis on our results just cause unnecessary anxiety. The bottom line is that if we are trading well, working hard and spending all of our mental energy in getting better as traders the results will come.
I hope this educates some of you on why percentage returns is not a relevant metric for us intraday traders. I know I didn’t have a clue this was the case when I first interviewed with Mike and Steve. I remember bella just rolled his eyes and just told me he made thousands of percent on a monthly basis. Us engineers and math inclined people just want to know all the little details…
Off to enjoy the remaining March madness games. Enjoy the rest of your weekend.