Rules Intended For Investing Or Investment Profits
Clearly, any person who trades does so with the expectation of making profits. We take risks to get rewards. The question each trader should answer, however, is what kind of return does he or she expect to make?
This really is a very important consideration, mainly because it speaks directly to what type of trading will take place, what market or markets are ideal to the purpose, and the types of risks required.
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Let s start off simple. Suppose a trader would like to make 10% per year on a really consistent basis with little variance. You will find quite a few options readily available.
If interest rates are sufficiently high, the trader could basically put the money in a fixed income instrument like a CD or a bond of some kind and take relatively little risk.
A trader seeking 100% returns each year would have an incredibly different situation. This individual won't be looking at the cash fixed earnings market, but could do so via the leverage offered within the futures market.
Similarly, other leverage based markets are much more likely candidates than cash ones, perhaps which includes equities. The trader will almost certainly require higher market exposure to accomplish the goal, and most likely will have to execute a larger quantity of transactions than in the prior scenario.
As you can see, your objective dictates the methods by which you achieve it. The end surely dictates the means to an excellent degree.
There's one other consideration in this particular assessment, though, and it truly is one which harks back to the earlier discussion of willingness to lose.
Trading systems have what are normally referred to as draw downs. A draw down would be the distance (measured in % or account/portfolio value terms) from an equity peak towards the lowest point immediately following it.
For instance, say a trader's portfolio rose from $10000 to $15000, fell to $12000, then rose to $20000. The drop from the $15000 peak to the $12000 though could be considered a draw down, in this case of $3000 or 20%.
Every single trader should figure out how large a draw down (in this case frequently thought of in percentage terms) he or she is willing to accept. It's very much a risk/reward decision.
On one extreme are trading systems with very, very small draw downs, but additionally with low returns (low risk - low reward). On the other extreme are the trading strategies with huge returns, but similarly huge draw downs (high risk - high reward).
Of course, each trader's dream is a system with high returns and small draw downs. The reality of trading, however, is frequently less pleasantly somewhere in between.
The question may be asked what it matters if high returns is the objective. It can be quite simple. The more the account value falls, the larger the return needed to make that loss back up.
That means time. Large draw downs have a tendency to mean long periods between equity peaks.
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