Guidelines Regarding Trading Or Investment Earnings


Clearly, anyone who trades does so with the expectation of generating profits. We take risks to acquire rewards. The question every single trader should answer, however, is what kind of return does he or she expect to make?

This is a very important consideration, as it speaks directly to what type of trading will take place, what market or markets are best suited to the purpose, along with the types of risks necessary.

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Let s start off simple. Suppose a trader would like to make 10% per year on a very consistent basis with little variance. There are quite a few options available.

If interest levels are sufficiently high, the trader could basically put the funds in a fixed income instrument like a CD or a bond of some kind and take relatively little risk.

A trader looking for 100% returns each year would have a very different situation. This individual won't be looking at the cash fixed income market, but could do so by way of the leverage offered within the futures market.

Similarly, other leverage based markets are far more likely candidates than cash ones, perhaps which includes equities. The trader will almost certainly require higher market exposure to achieve the goal, and most likely will have to execute a larger number of transactions than in the prior scenario.

As you can see, your goal dictates the strategies by which you achieve it. The end definitely dictates the means to an awesome degree.

There's one other consideration in this particular assessment, though, and it's one which harks back to the earlier discussion of willingness to lose.

Trading systems have what are commonly referred to as draw downs. A draw down would be the distance (measured in % or account/portfolio value terms) from an equity peak to the lowest point promptly following it.

For instance, say a trader's portfolio went up from $10000 to $15000, fell to $12000, then rose to $20000. The drop from the $15000 peak to the $12000 though would be considered a draw down, in this case of $3000 or 20%.

Each trader should determine how big a draw down (in this case commonly thought of in percentage terms) he or she is willing to accept. It is actually very much a risk/reward decision.

On one extreme are trading systems with very, very small draw downs, but also with low returns (low risk - low reward). On the other extreme are the trading systems with huge returns, but similarly large draw downs (high risk - high reward).

Naturally, each and every trader's dream is really a system with high returns and small draw downs. The reality of trading, however, is often less pleasantly somewhere in between.

The question might be asked what it matters if high returns is the objective. It is quite simple. The more the account value falls, the larger the return required to make that loss back up.

That means time. Huge draw downs have a tendency to mean long periods among equity peaks.

Guidelines Regarding Trading Or Investment Earnings
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