Most professional CTA’s look and think about trading in a much different way than an average trader or investor would, and the reason for this is not hard to understand.  If a CTA is successful what it means to me is that they have dedicated their lives to the craft.  Every trader wants to be successful, the subtle difference with a profitable CTA is that they need to be successful, this is their livelihood.

They are willing to spend every waking hour learning their craft, testing and back-testing new systems, methodologies, and philosophies, this obviously takes a lot of time.  Think of it this way, if you had to go to court to defend yourself on a matter that would affect your life indefinitely would you represent yourself “Pro Se?  If you knew all the ins and outs (tricks of the trade) of the “law”, then you possibly could consider it, however what most people overlook would be the amount of time and mental energy this endeavor would cause you to undertake, not to mention the stress and sleepless nights. Even if you did know “the law” and felt you were right, if you were to go up against a proficient lawyer who knew the “market”, the judges, how the game is played, but more important that his whole professional life revolves around knowing his business and spending probably 14 hours a day or more practicing it, not to mention having a staff, and a pool of resources (that you don’t), to “Win”, you would probably reconsider going it alone, unless you wanted to spend the rest of your life being a “professional defendant.  This is a good metaphor to a profitable CTA in my opinion for the reasons given above.

Here are the Six Key Variables a CTA knows that you may not.  I will cover 3 of them in this article and then the other 3 in a follow-up.

#1.  Knowing the reliability, or what percentage of the time your trades make money.  As an example, if a CTA were to make 10 trades (I recommend using a larger data sample), and they made money on 6 of them and lost on 4 of them then their reliability would be 60 percent. To compute reliability, it is the number of winning trades divided by the total number of trades. Some CTA’s may refer to reliability as the “hit rate”.  Basically, it is the percentage of time their trading system is “right”.

#2.  How big your portfolio (risk capital), is compared with your losses (when traded at the smallest possible increment (ex: one futures contract).  The relative size of your profits and losses would be the exact same if you lost 1 point in the S&P on losing trades and made 1 point in the S&P on winning trades. However the “relative size” would be quite a different story if you made, on average 10 points on winning trades and lost 1 point on losing trades. This would be 10 to 1.

CTA’s can get a good ratio of the relative size of their profits to their losses by taking the average size of their winning trades and comparing that to the average size of their losing trades.  This will give them a good idea of “relative size”, however, if they have one huge profit and many small losses this would not be an exact measure.

A more exact measure is to think of gains as multiples of the “Initial Risk” (R) that you took on that trade. Your gains may then be a whole series of R multiples.  For example, let’s say you are willing to risk $1000 on a trade (you will exit immediately if you have a $1000 loss, so that it doesn’t increase).  Your basic risk is $1000. Therefore, a $2000 gain would be a 2-R multiple gain and a $5000 gain would be a 5-R multiple gain. If by some unfortunate event in the marketplace occurred and you suffered a $2000 loss, then you’d have a 2-R loss.

#3.  The cost of making a trade.  This is the erosion that occurs to a CTA’s account size whenever they trade due to execution costs, fees, and commissions, also slippage. Most of the time CTA’s include these costs when figuring their average gains and average losses. However it is wise to be aware of just how large these costs are.  They add up quick, especially with higher frequency of trades made.  Costs and fees have obviously come way down over the years but are still a factor.

As, I said above these are 3 of the 6 key variables a CTA or professional manager knows and focuses on that you may not.  If you have any questions please feel free to get in touch with us through our website at: , you can email me direct at, or feel free to call anytime:  312-561-3145.  Twitter:

I will follow-up tomorrow with the next 3 key variables.