Nearly everyone starts trading with unrealistic expectations.

*“If I make a 0.5% returns every day I can make over $100k in a year on 20k of starting capital.” 0.5% return every day sounds realistic, right?*

Wrong.

Let’s sense check that…

If we could make 0.5% returns every day… then our 20k would be worth:

- $123,000 in a year
- $759,000 in two years
- $4,685,000 in three years
- $29,000,000 in four years
- $179,000,000 in five years

How many people have you heard of that have turned $20,000 into $180 million dollars in five years? *(Outside of Instagram poserliars?)*

The problem is that the market is volatile – and market edges are volatile too.

You might be able to make 0.5% returns every day **on average** *(that would be an annualised return of about 500%)* but each day’s returns are going to sit in a very wide spread around that number. This is the “risk” that accompanies the “return”. You can’t escape this.

This spread or “volatility” means you are likely to go bankrupt if you tried to target returns this large. It also reduces the extent to which you can compound your money even if you are more conservative in your sizing.

## OK, so what level of risk /return is realistic?

Have you ever heard of Renaissance’s Medallion Fund?

Jim Simon’s work of quant trading art, the pinnacle of large scale systematic trading?

What was the performance of the Renaissance’s Medallion Fund? If we believe this Bloomberg article then the long-run return characteristics from Medallion (after fees) was:

- a mean return of 44%
- annualised volatility of 21%

That’s a Sharpe Ratio of about 2.

At RW we like to play with random data. We have a GBM simulator which simulates random realisations from a process with a known edge.

We can use the simulator to see what the daily experience of investing in the world’s highest-performing systematic hedge fund might “feel” like.

Here we have simulated 10 price paths with the long-run risk/return characteristics of the medallion fund (after fees).

We have plotted three of those price paths:

- The green one is the one with the highest returns – think of this as being very lucky with a very good edge.,
- The black one is the one with median returns – think of this as having an average amount of luck with a very good edge
- The red one is the one with the lowest returns – think of this as being very unlucky with a very good edge

### What would investing in RenTech’s Medallion Fund Feel Like if we were Lucky?

Now, let’s concentrate on the highest performing of the 10 random portfolios. This is the green line. And its summary statistics are the first number in the green, orange and red boxes.

If we were invested in the greatest systematic portfolio ever constructed *(and could trade in the past before massively scalable cloud computing was available to everyone)* and we were really really lucky, then we would have realised:

- annualised returns of 59.3%
- a sharpe ratio of 3.3

which is extraordinarily good, obviously.

But we would also have had to sit through a 15.5% drawdown – which lasted for 98 days (about half a year in trading days).

In the greatest systematic portfolio ever made (the Rentech medallion fund), with a huge slice of luck, you still would have had to sit through a +15%, 6 month drawdown…

*What does this tell you about your ability to discriminate between whether something is good from a month or two of returns?*

### What Would Investing in Medallion Feel Like if we were Unlucky?

**Now, let’s consider the red line…** This is a return stream with the same characteristics as the Medallion’s historic performance – but this time we are simulating being unlucky.

In this case, we realised:

- annualised returns 24.4%
- a sharpe ratio of 1.3

In this case, we were unlucky. Our “edge” was a “Sharpe 2” edge, but we were unlucky so we realised a Sharpe ratio of 1.3.

This is normal, of course, 50% of the time we are luckier than expected and 50% of the time we are less lucky than expected.

To get those lovely 24.4% annualised returns we needed to sit through a 24% drawdown which lasted 459 days.

Let me reiterate this in bold…

In the greatest systematic portfolio ever made (the Rentech medallion fund), if you were unlucky, you would have had to sit through a 24%, 21-month drawdown…

*Do you think you can do better than RenTech – with their massive infrastructure, their phalanx of the smartest people in the world, their exchange rebates, their huge access to buying power, to dark flow, their scalability?*

Probably not, right? The only meaningful advantage you have is that you can go after very capital-constrained stuff that isn’t worth their time… *(though my guess is that they are cost-efficient enough to go after quite a lot of that stuff anyway.)*

## What Does This Mean For The Trader?

You have to get rid of unrealistic expectations of a certain, steadily increasing equity curve.

Market returns are noisy and uncertain. Even massive edges like Medallion’s need time to play out.

You need to be realistic and patient.

And you need to drop wishful thinking that there might be “something better”, a “trick nobody has realised yet”.

There isn’t. It doesn’t exist. Market returns come with associated noise and market risk. The people on instagram and trading forums saying otherwise are lying liars and their pants are on fire.

Appreciating and accepting this noise – this “mayhem” – is the key to trading enlightenment.

- You will realise you will never and can never “figure out” the market.
- You will realise that simplicity and robustness are essential if you’re going to give yourself a chance.
- You will realise that good trading always “feels dumb” – because the short term results are utterly dominated by randomness.
- You will realise you don’t need to figure out the market. It appears we can identify bets with a reasonable chance of being positive expected value. We have to systematically throw a lot of those at the wall….and see what sticks.

If you have realistic return expectations and are keen to join a community of supportive hard-working traders, then our Zero to Robot Master Bootcamp is currently open for registrations.

Thank you for pointing out the reality. Just a 10 min search in Google shows many Get-Rich trading bots and methods. Expectations are high for beginners and reality is really different.

Given the above, i.e. 24% AR for the worse case scenario for best systematic portfolio ever made, wouldn’t it be reasonable to assume that the average retail trader with a decent level of knowledge, skills and experience couldn’t consistently make 1/2 of that on a good year? If that’s a reasonable assumption, why wouldn’t we simply invest in the S&P 500 index or top ten stocks, which have consistently made a 9.8% AR over the past 90 years?