Sunday, January 22, 2017

Speculative return projections for 1 year of the trade I'm doing

I ran a Monte Carlo Simulation on a computer program that simulates one year of the trade I'm planning (after the 1-contract test period).


The assumptions I'm making are as follows:

  • I assume the trade works 80% of the time (and fails 20% of the time).
  • For each winning trade, we earn $125 per contract
  • For each losing trade, we lose $75 per contract
  • We also lose $9.88 per trade (round trip) in commissions and fees, win or lose
  • We are using a brokerage with only $500/contract margin required for day trading, and we press this to 90% of the possible maximum
  • I also assume that getting a 1000-contract trade filled is possible
Given all that, with 100000 runs starting each with $5000:
  • At minimum, we end with $10,857,638
  • At maximum, we have $21,823,532
  • On average, we have $16,513,832
  • The standard deviation is about $1.3 million, meaning there's a 68% chance of being between $14.2 million and $17.8 million
Do I really think this is possible?

Theoretically, yes; this is a highly leveraged trade.  Increasing the number of contracts (up to this high ceiling of 1000) is the key point.

But practically no:
  1. I don't have the data to show 80% wins; I do have comments from two traders doing similar trades that (a) usually works and (b) wins 90%+. So 80% seems reasonable, but I don't know.
  2. I'm going to start taking money out of the trade as soon as it starts showing results anything like this; I want to quit my job, for starts, and just use this as income to live on.
  3. You have to do this every day to get these results; skipping a day for whatever reason will reduce your expected return.
  4. I'm not at all certain that I can get 1000 contracts filled. It may be more like 200 or 250, which would reduce the returns significantly.
Hang on to your hat! I'm hoping to quit my job by April 30 ...

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