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Guidelines For Trading Stocks Or Investing Returns

Author: Craig

Clearly, any person who trades does so with the expectation of making profits. We take risks to gain rewards. The question each trader ought to answer, however, is what type of return does he or she expect to make?

This is an extremely important consideration, as it speaks directly to what kind of trading will take place, what market or markets are ideal to the purpose, and the kinds of risks required.

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Let s start out simple. Suppose a trader would like to produce 10% per year on a very consistent basis with small variance. There are a number of options readily available.

If interest rates are sufficiently high, the trader could simply put the money in a fixed income instrument like a CD or perhaps a bond of some type and take relatively little risk.

A trader looking for 100% returns every year would have a very different situation. This individual will not be looking at the cash fixed earnings market, but could do so via the leverage offered in the futures market.

Similarly, other leverage based markets are more likely candidates than cash ones, perhaps such as 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 number of transactions than in the previous scenario.

As you can see, your objective dictates the methods by which you achieve it. The end certainly dictates the means to a great degree.

There is certainly one other consideration in this specific assessment, though, and it is one which harks back to the earlier discussion of ability to lose.

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

For example, say a trader's portfolio rose from $10000 to $15000, dropped 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%.

Each trader must figure out how large 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 choice.

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 systems with large returns, but similarly huge draw downs (high risk - high reward).

Of course, every trader's dream is a system with high returns and little draw downs. The reality of trading, however, is typically less pleasantly somewhere in between.

The question might be asked what it matters if substantial returns is the objective. It's quite simple. The more the account value falls, the bigger the return needed to make that loss back up.

That means time. Large draw downs tend to mean long periods between equity peaks.

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