Sunday, August 22, 2010

Yes, You ARE Looking for the Holy Grail : A Message for People New to Trading

It is very interesting to analyze the answers you get when you ask people what they are looking for and if they think that what they are looking for is the automated trading "holy grail". This mythical piece of code is an EA that does NOT exist which achieves "unbelievable" results. However despite the fact that most people will utterly deny that what they look for is the holy grail - they will always say they know the holy grail doesn't exist - when you analyze the answer to the question "what are you looking for in a trading system?" you will realize that the bast majority are indeed looking for this mythical piece of code. On today's post I will talk about the holy grail and new traders and especially the relative character of the definition of this term and why so many people are looking for it even if they categorically reject to be doing so.

What average yearly profit to max DD ratio do you consider realistically achievable ?

So what is this trading "holy grail" exactly ? Its definition is actually simple and yet very complex. In my mind a holy grail is a hypothetical system which achieves results superior to the highest achievable maximum draw down to average yearly profit ratio allowed by the market in real returns over the past ten years. This means that any system that can do better than how the best REAL trader has done within the past 10 years is the holy grail. The best way to measure this "better" character is by using the above mentioned ratio which compares profit to risk.

When we look at the performance of forex traders for the past ten years -and the best registered traders since then- we notice that any system that achieves an average yearly profit to maximum draw down ratio of 5:1 over a ten year period is in fact a holy grail (check my post on the Barclay index to learn more about REAL long term performance of forex traders). This means that - being realistic - a system that achieves a 100% yearly profit with only a 20% maximum draw down over ten years is a holy grail. A system that is extremely unlikely to exist due to the very nature of the markets and the long term limitations on performance it imposes.

When we then ask new traders what they are looking for the answers are actually quite interesting. As a matter of fact, the above mentioned realistically inferred holy grail becomes the "lower standard" of a given set of return figures that are inferred from short term results and "lore" rather than from actual long term real performance records and realistic expectations. The 100% yearly profit with 20% maximum draw down becomes something that new traders perceive can be "easily achieved" and things like a 20% monthly profit with a 5% maximum draw down start to become the "grail" targets.

As traders start to accumulate more experience and they get to know the market and the inherent limitations of profitability and draw down they start to lower these figures. A trader with one year of experience is bound to give a 5% monthly profit with a 5% maximum draw down as a realistic expectation while it usually takes traders 5-7 years to realize that the before mentioned grail of a 5:1 ratio of average compounded yearly profit to maximum draw down ratio taken from real performance data is actually the real "extremely hard to achieve" target.

So chances are that if you are a relatively new trader you are looking for a system which is quite unrealistic and your actual "holy grail" is way beyond the limits of what the market is willing to let you get. In the end, most traders are looking for holy grails, even if they believe they currently have "realistic" and sound expectations of draw down and profitability for their trading systems. If you would like to earn a true education in automated trading and learn how you too can design and build your own systems with realistic profit and draw down targets please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)

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