Expectations For Trading Or Investing Returns
Below is a MRR and PLR article in category Finance -> subcategory Investing.
Expectations for Trading or Investing Returns
Summary
When it comes to trading or investing, everyone is driven by the desire for profits. However, it's crucial for each trader or investor to define their expected return. This expectation shapes the type of trading, the choice of markets, and the risks involved.
Understanding Return Expectations
To illustrate, consider a trader aiming for a 10% annual return with minimal risk. If interest rates are favorable, a fixed-income instrument like a CD or bond could suffice. If not, exploring other markets like stocks, commodities, or currencies might be necessary. In this scenario, fewer transactions might be needed.
On the other hand, a trader seeking a 100% annual return faces a different challenge. Fixed-income markets won't suffice; leverage-based markets, such as futures or equities, become essential. Achieving this goal requires greater market exposure and more frequent trading.
Clearly, the goal determines the strategy.
Considering Drawdowns
Another vital consideration is the tolerance for drawdowns ?" the drop from a peak to a subsequent low in portfolio value. For instance, if a trader’s portfolio rises from $10,000 to $15,000, then drops to $12,000 before climbing to $20,000, the $3,000 (or 20%) decrease represents a drawdown.
Traders need to decide the maximum drawdown they can accept, as this is a risk/reward decision. Some systems have low drawdowns but also low returns, while others offer high returns with significant drawdowns. Ideally, traders want a system with high returns and small drawdowns, but reality often lies somewhere between.
Managing Emotional Stability
Why does this matter, especially with high-return goals? Larger drawdowns mean requiring higher returns to recover, which takes time. This prolonged recovery can be emotionally destabilizing, possibly leading traders to abandon strategies too soon. Therefore, it’s essential to be comfortable with potential drawdowns.
Aligning Expectations with Timeframes
Matching expectations with the trading timeframe is critical. More frequent trading may be required to meet certain risk/return profiles. If expectations and timeframes clash, reassessment is necessary since adjusting the timeframe might not be feasible, especially when shifting from long-term to short-term strategies.
In conclusion, understanding and aligning return expectations with trading strategies and timeframes ensures better decision-making and emotional resilience in trading.
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