“Let’s raise a standard where the good and wise can repair. The rest is in God’s hands.” George Washington
While reading “Thunder of Silence” by Joel Goldsmith I got a strong surge of intuition to compare the SafeMoneyMetrics® net ratio with a traditional rate of return. The net ratio represents account profitability based on actual capital at risk. ROR represents profitability based on the advisors required account size. The perfectly clear insight arrived this morning and replaced the topic originally planned for this month’s article.
I was going to demonstrate the benefits of analyzing individual trade data this month, but that topic will keep! Analyzing individual trade data is where SafeMoneyMetrics® does the most good for the greatest number of people.
WHY? A trader has instant feedback as to the quality of their decisions relative to current market conditions. They can use that feedback to improve upon and maintain their best decisions. As the consciousness of a trader grows or expands, quality of their trading improves instantly – WHY? Because everything in material reality begins with quality of consciousness – everything changes when our consciousness shifts and skills improve. Nothing can ever change unless we change the quality of consciousness and beliefs. I can have superb skills – if beliefs work against universal principles – material reality will always reflect errors in my beliefs. To change our beliefs, we must first recognize what they are. The closer our beliefs align with universal truth or creative life principles, the healthier our material reality becomes! This fact or Universal principle can only be experienced from within each individual.
Past returns reflect the quality of consciousness and skill as it expressed itself yesterday relative to market conditions that already happened. Finally, if a trader is too mired in material reality without heightened awareness, my guess is that the advisor, no matter how good their track record appears to be has more risk than we are willing to live with.
“The mind in its sleeping state, filled with materialistic beliefs, theories, opinions, doctrines and creeds can only manifest its own state of chaos; but a mind freed of these beliefs becomes the instrument through which the creative Principle of life can flow as harmonious and eternal form. The external appearance is always mind-formed. As we sow mentally, so shall we reap.” Joel S Goldsmith – Thunder of Silence
Now let’s move forward! Volatility, Illusion of or Real
Advisor One
The green line is a SafeMoneyMetrics® net Ratio – the Net Ratio represents capital at risk relative to realized and unrealized returns. Open trade equity is an unrealized return. The formula is net of advisor fees and clearing costs. We perceive that the Net Ratio closely represents real volatility relative to return because the formula is calculated using returns based on capital at risk rather than account size.
The blue line represents a traditional rate of return on fully funded account values net of advisor fees and clearing costs. We perceive that this represents an appearance of volatility and return.
Evaluating a relationship between the NET and ROR values, especially applied to daily data can provide consistent guidelines to account risk under current market conditions.
Look at Advisor ONE in the data table below. The average minimum and maximum values of a Net Ratio represent real volatility on capital at risk. The ROR values represent appearances of account volatility on the total account size, which has little relevance to capital at risk.
|
Advisor One |
Advisor Two |
||
|
Net Ratio |
ROR |
Net Ratio |
ROR |
Average |
18.27% |
3.94% |
8.55% |
1.18% |
Minimum |
-23.84% |
-5.31% |
-130.37% |
-19.33% |
Maximum |
200.96% |
44.11% |
225.03% |
32.82% |
Advisor Two
Now look at Advisor Two in the table above, then on the graph below. On the graph below, the green net ratio represents real volatility relative to return. Remember, the data is calculated using capital at risk. The blue ROR is an appearance (the illusion) of account volatility.
Truth is hidden beneath the advisor’s required account size. This advisor requires a $2M account size and appreciates being compensated on a fully funded account value of $2M. We would be compensating them to create less money and increase our risk!
Real trading talent or lack of it usually lurks beneath the surface of Traditional Rate of Return calculations.
We need heightened awareness as to the quality of mind, beliefs and skills driving the trading decisions and corresponding analysis to create any degree of long-term comfort in this growing industry! Nothing else Matters!