Can Retail Traders Trade like the World’s Biggest Hedge Fund? Yes!

Ray Dalio built Bridgewater Associates into the world’s largest hedge fund, on one simple idea — safe assets can give big returns if lever them correctly.

Yes, yes, yes. I know that Risk Parity strategy has been a huge beneficiary of secular yield declines, global yield compressions and that greatest gift of all — Quantitative Easing.

But details aside, the fundamental insight that made Dalio billions upon billions of dollars was that you did not have to risk your hard earned money on risky stocks. You could just buy nearly risk-free treasury assets and then lever them up so that a one year t-bill yielding a virtually guaranteed rate of 1% levered 5X would suddenly transform itself into a 5% annual return without any of the heart palpitations of holding stock.

I am of course simplifying greatly, but Dalio’s success holds lessons for us all. We all have a variety of strategies we trade in FX. Some are lottery type payout ideas that bleed money until one big hit pays out for a year’s worth of work. Others are just the opposite. Insurance like products that provide small but steady profits each day but can wipe out half the equity on one badly stopped trade. And then there are strategies that just tread water.

I have one such day strategy myself. It makes about twenty trades per week and on a good week ekes out about 40-50 pips of profit. It has modest stops and even more restrained profit targets and just the tiniest of an edge to give me a small return. All in all, it takes about 100 trades to make 100 pips of profit from this strategy.

That probably horrifies most of you. I still remember the howls of outrage from some of my members when I told them that most good day trading strategies essentially have a positive expectancy of about 1 pip per trade. This is basically equivalent of walking up Broadway from downtown to uptown and bending up at each street intersection to pick up a penny. After about 10 blocks you will quickly grow tired of the task. But imagine if you had an automatic hoover machine that grabbed those pennies for you. Not only that, it sorted them out, put them in rolls, deposited them in your bank account without you doing any work.

That’s the power of a day trading robot. If I had to hunt and peck my way to 100 day-trades a month, I would have stopped a long time ago. But with my EA working 24 hours a day, I never have to worry about missing an entry, managing my exit or watching the market. This very modest strategy runs by itself and slowly adds pips to my account.

This is where Ray Dalio’s strategy comes in. While my day trading is hardly a Treasury bill, it is the lowest volatility strategy in my portfolio. It rarely declines by more than 50 to 100 pips from peak to trough. That means I can margin it at 5X lever and have decent shot at making 500 pips per month or about 5% on my money. That’s huge! If I even come close to that target that means I can aim for 60% returns with maybe 20% max drawdowns. Such payouts just don’t exist in standard market instruments where the absolute best you can hope for is to lose about half what you seek to gain (so if you want to double your account, be willing to lose half of it — and very likely more than that).

That’s the power of automated trading in today’s retail markets. It allows you to mimic the risk profile of the world greatest hedge fund, without having a billion dollars in the bank.