Tip: think in percentages and not in dollars.
I often get DM’s asking me for advice on trading. One of the things I’d recommend to newbies, is : get into the habit of thinking in %age terms and stop using $ amounts.
Why? There are many reasons.
1) When a trader says “I made $200 this week”, it tells me nothing of real value. Cos if their account size was $1,000, then that’s a great 20% weekly return, but if their account size was $100K, then it’s a measly 0.2% return. And performance is always reported in percentage terms. If a hedge fund makes an annual return of say 20% long term, then people know that if they put in $1million, then, on average, after a year, their investment will be worth $1.2million. This means something. If a hedge fund reported that they made $4,217,565 last year, then this means very little.
2) It removes some of the emotions from trading. Imagine saying to yourself “Oh damn, I lost $600 this week. I could have gone on a vacation with that $600”, as opposed to saying “Damn, I lost 6% this week” . Which one of these is more loaded with emotions?
The former accentuates negative emotions, and we see the loss as real money which could have been converted to actual things. The second approach sees the loss as a mathematical number. The key is to reduce emotions to a minimum when trading and doing it as mechanically as possible.
3) Set targets to be percentages not dollars. Every trade that I open, my targets are always something along the lines of “I will close half when the trade is up X%….and take a loss at Y%….” . It is never “I want to make $4,500 on this trade.” When traders start thinking in terms of “I want to buy a new car, so I need to make $25,000 this year”, then they are setting themselves up to fail. Emotions start playing too big a part, FOMO kicks in, revenge trading rears its ugly head, and doubling-down is seen. Don’t trade with a dollar target for the year. Trade to become a better trader.
IMO, one of the first things a trader needs to do, to become proficient, is to adapt this change and get into the routine of thinking in percentages.
Start thinking in percentages and not in dollars.
byu/Connect_Boss6316 inoptions
Posted by Connect_Boss6316
7 Comments
Thank you so much for sharing this the car example in number 3 is me having wanting to trade my way into my first car and I’ve repeatedly run into the same issues you described with having the dollar amounts focused on rather than percentages!
If someone could deliver 0.2% returns consistently, no matter what the market conditions, they’re doing amazing – it’s not a measly return if it’s consistent. If that’s their good week, that’s not so great.
I’ll add that $ gains/losses, risk : reward ratio, and win % can be important though and do tell a full story.
“I usually risk $500 to make $1000 and my win % is 50%.” This trader is profitable.
Thinking in terms of R and risk is great too. “I average positive 5R a week” is great too, and that R can be $50 or $500, but both scenarios the trades are great.
There’s another way to look at it too i feel.
For a **suitably large account** a 0.2% that translates to say $20k, I ll say thats pretty good even though inefficient.
At the end of the day $20k is $20k and nothing to scoff at.
To each their own.
> Damn, I lost 6% this week
this one evokes stronger emotions by far! the $600 doesn’t have a reference point, but the 6% means I have to make 6.4% to get back. And 6% is way above my risk tolerance of 1% loss per day which means there was a loss I hadn’t anticipated, which means there could be other things I haven’t thought of.
For evaluating performance over time, percentage returns, Sharpe ratio, etc are all preferred to changes measured in dollars, yes. Counterpoint, All the options Greeks are measured in dollars, e.g. dollars option price per dollar share price, dollars option price per point of volatility, as opposed to fractional or percentage changes. If you are thinking mostly about risk and reward, dollars are relevant. Most people don’t have logarithmic risk. For instance losing half your money is more painful if it means you can’t afford to house yourself than if it means you have to trade your McMansion to get a regular family home. Or for example making $100 on a $1 bet is generally a lot less impressive than making $1000 on a $10000 bet because less was earning and less was on the line.
Both can be relevant. So many with small accounts may make a decent annual percentage. However their hourly wage for time spent is peanuts.
Sharpe ratio is another useful concept. I see plenty of people doing high percentage trades with decent returns with a tiny chance of catastrophic losses. This is playing financial Russian roulette. Despite good percentage and dollar returns for many months the long run projection is catastrophic losses.