Goal / Target Setting and Performance Measurement for Futures Trading

What is the reasonable goal or target of expected return we need to set for ourselves to make taking the higher risk in futures trading worthwhile ?  Everyone has got their own numbers.  How do we grade ourselves?  Everyone has their own way as well.  I'm going to share a quick and dirty way here.

First, we use the leverage in the product that we are trading to set the goal or target of expected return.  Let's take FCPO for example:

The settlement on Friday for most active month (Jan14) was 2401.  Contract multiplier is 25 and the margin (both initial and maintenance) at the moment is RM4500. 

Leverage = actual contract size / initial margin
                = (2401 x 25) / 4500
                = 13.34
Let's round  it to 13.

If we take risk-free rate here as our BNM's OPR at 3% now, then the expected return (goal / target) we should be looking at for taking the risk to speculate in FCPO should be 13 x 3% which is 39% per annum!  Of course that is the ideal target or 100 marks equivalent in our exams.  In actual trading we won't be putting up just the exact initial margin but maybe 2 to 3 times more per contract.  If your trading rules is to put up 2 x the required margin then your expected return would be lower down by half to 19.5% per annum as the leverage is lower by half.  Putting 3x margin would lower down your target to 13% return per annum.  Of course with position sizing algorithm, your return should be higher.  The example shown here is pure basic 1 contract. 

As you can see if your system needs RM30,000 to trade a contract, your expected return becomes 6% which may not be that attractive anymore.  This will be a quick guide for you to search or develop a trading system that gives you a favourable reward to risk ratio.

How do we measure our own performance?  Quick and dirty way would be the same way we grade in exams.  If 50 points is the equivalent of making 3% (risk-free rate) or just pass then we need 80 points and above to get A.  If we use 2x margin per contract, you would need a return of (0.6 x (19.5-3) + 3) = 12.9% and above per annum to get an A!  Of course statistics shown that most traders would get an F which is losing money!  Trading would be one of the most challenging subjects in life to get an A year after year, let alone trying to be an outstanding student which is to beat the target every year.

That's my quick and dirty way to set the target and do self performance measurement in futures trading.  Cheers & Happy Trading!