Expectations Regarding Trading Or Investing Returns
Clearly, anyone who trades does so with the expectation of generating profits. We take risks to gain rewards. The question each trader must answer, however, is what type of return does he or she expect to make?
This is an incredibly important consideration, mainly because it speaks directly to what type of trading will take place, what market or markets are best suited to the purpose, along with the kinds of risks required.
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Let s start simple. Suppose a trader would like to produce 10% per year on a very consistent basis with small variance. You will find quite a few options available.
If interest levels are sufficiently high, the trader could simply put the money in a fixed income instrument like a CD or a bond of some type and take relatively little risk.
A trader looking for 100% returns every year would have an incredibly different situation. This individual won't be looking at the cash fixed income market, but could do so by way of the leverage offered in the futures market.
Similarly, other leverage based markets are more likely candidates than cash ones, perhaps including equities. The trader will almost certainly call for higher market exposure to achieve the goal, and most most likely will have to execute a larger quantity of transactions than in the prior scenario.
As you can see, your goal dictates the strategies by which you achieve it. The end certainly dictates the means to an excellent degree.
There is one other consideration in this specific assessment, though, and it's one which harks back to the earlier discussion of ability 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 to the lowest point promptly following it.
For example, say a trader's portfolio rose from $10000 to $15000, fell to $12000, then rose to $20000. The fall from the $15000 peak to the $12000 though would be deemed a draw down, in this case of $3000 or 20%.
Every single trader should determine how big a draw down (in this case usually thought of in percentage terms) he or she is willing to accept. It is very much a risk/reward decision.
On one extreme are trading systems with very, very little draw downs, but also with low returns (low risk - low rewards). On the other extreme are the trading strategies with huge returns, but similarly large draw downs (high risk - high reward).
Naturally, every trader's dream is a system with high returns and small draw downs. The reality of trading, however, is generally less pleasantly somewhere in between.
The question might be asked what it matters if substantial returns is the objective. It can be 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 tend to mean long periods between equity peaks.
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