Guidelines Intended For Trading Or Investing Earnings

Clearly, anyone 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 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 best suited to the purpose, and the types of risks required.

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Let s start off 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 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 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 income market, but could do so via the leverage offered within the futures market.

Similarly, other leverage based markets are more likely candidates than cash ones, perhaps which includes 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 goal 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 specific assessment, though, and it's one which harks back to the earlier discussion of ability to lose.

Trading systems have what are commonly referred to as draw downs. A draw down is the distance (measured in % or account/portfolio value terms) from an equity peak to 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 fall from the $15000 peak to the $12000 though would be regarded as a draw down, in this case of $3000 or 20%.

Each trader must determine how large a draw down (in this case frequently 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 systems with large returns, but similarly large 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 typically less pleasantly somewhere in between.

The question might be asked what it matters if large returns is the objective. It is quite simple. The more the account value falls, the bigger the return required 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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