Jul

14

Here is a simple simulation about how easy it is to get lucky and rich trading futures. Continuous S&P 500 emini futures daily return 97-07 was used to find mean daily and standard deviation:

mean  0.126 pt
sd     13.452
count  2477 days

This mean and standard deviation were used to produce random series of daily changes (normally distributed), for 1000 days for each of 100 hypothetical traders (HTs). HTs don't have any skill predicting the market; they trade hypotheses in chat-rooms but buy and sell index futures at random. All the HTs start with $100,000 equity, and trade single emini contracts 1000 days until we check their performances. (This is about 0.75X leverage; $50 for 1 emini, less $6 vig for both sides of each trade. Effects of taxes, account fees, platform fees, research costs all = 0).

Of the 100 HTs trading just 1 emini at a time, the average final balance was $98,965; loss of about 1%. None went below $10,000 equity ("bust"); the lowest point for the worst trader was $41,500. The winner finished with $153,751; a gain of almost 54% (his hypotheses about markets was like Ayn's).

There was another group of 100 traders, the HRHTs (High-rolling-hypothetical-traders). This daring crew also started with $100,000 each, but traded five mini contracts each 1000 times (About 3.75X leverage; $250/pt, $30 vig round trip). The HRHTs average final balance was about $95,000, but this erroneously includes those with large negative equity at the end. Turns out 40/100 HRHTs busted somewhere along their 1000 trades (defined as equity < $10,000. OK they give up too easily, but if they were allowed to borrow from mom the worst HRHT would have ended with -$189,000). However the winner of the HRHT contest finished with $368,756!

Even without market prediction skill, leveraged trading in updrifting market can be profitable just by chance. And the more leverage used, the higher the possible return and risk of ruin.


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