Expectations for Trading or Investing Returns
Clearly, anyone who trades does so with the expectation of making profits. We take risks to gain rewards. The question each trader must answer, however, is what kind of return he or she expects to make? This is a very 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 kinds of risks required.
Let s start with a very simple example. Suppose a trader would like to make 10% per year on a very consistent basis with little variance. There are any number of options available. If interest rates are sufficiently high, the trader could simply put the money in a fixed income instrument like a CD or a bond of some kind and take relatively little risk. Should interest rates not be sufficient, the trader could use one or more of any number of other markets (stocks, commodities, currencies, etc.) with varying risk profiles and structures to find one or more (perhaps in combination) which suits the need. The trader may not even have to make many actual transactions each year to accomplish the objective.
A trader looking for 100% returns each 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 in the futures market. Similarly, other leverage based markets are more likely candidates than cash ones, perhaps including equities. The trader will almost certainly require greater market exposure to achieve the goal, and 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 certainly dictates the means to a great degree.
There is one other consideration in this particular assessment, though, and it is one which harks back to the earlier discussion of willingness to lose. Trading systems have what are commonly referred to as drawdowns. A drawdown is the distance (measured in % or account/portfolio value terms) from an equity peak to the lowest point immediately following it. For example, say a trader's portfolio rose from $10,000 to $15,000, fell to $12,000, then rose to $20,000. The drop from the $15,000 peak to the $12,000 trough would be considered a drawdown, in this case of $3000 or 20%.
Each trader must determine how large a drawdown (in this case generally 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 small drawdowns, but also with low returns (low risk – low reward). On the other extreme are the trading systems with large returns, but similarly large drawdowns (high risk – high reward). Of course, every trader's dream is a system with high returns and small drawdowns. The reality of trading, however, is often less pleasantly somewhere in between.
The question might be asked what it matters if high returns in 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 drawdowns tend to mean long periods between equity peaks. The combination of sharp drops in equity value and lengthy time spans making the money back can potentially be emotionally destabilizing, leading to the trader abandoning the system at exactly the wrong time. In short, the trader must be able to accept, without concern, the draw-downs expected to occur in the system being used.
It is also important to match one's expectations up with one's trading timeframe. It was noted earlier that in some cases more frequent trading can be required to achieve the risk/return profile sought. If the expectations and timeframe conflict, a resolution must be found, and it must be the questions from this expectations assesment which have to be reconsidered, since the time frames determined in the previous one are probably not very flexible (especially going from longer-term trading to shorter-term participation).
John Forman is author of The Essentials of Trading, and a near 20 year veteran of trading and analyzing the markets. John is Managing Analyst & Chief Trader for Anduril Analytics, which offers free trading reports here.


Trading and Time: Determining Your Best Time Horizon
Trading requires time in a couple of ways. The first is the time dedicated to developing a trading system. This can be thought of as a one-off thing, but in reality it is more an on-going process. Once a system is in place, time is required in terms of monitoring the markets for signals, executing transactions, and managing positions. How much time all these different elements require depends on the trading system. The trading system, in turn, needs to take in to account the amount of time the trader has available. This article discusses the considerations which go in to helping one determine their best trading timeframe.
The first question to be answered is how much time each day/week/month (whichever is most appropriate) can you dedicate to the various requirements of trading and managing a trading system? Different trading styles require different time focus. As a rule, the shorter-term the trading, the more specifically dedicated time required. A day trader, for example, runs positions which are opened and closed during the same session. This normally means a lot of time spent watching the market for entry and exit signals. An intermediate or longer-term trader who holds trades for weeks or more does not have to dedicate the same amount of time to watching the markets. He or she can usually get away with only spot checking from time to time. Of course there is a whole array of possibilities in between. Knowing where you fall in the spectrum of possibilities is an important part of developing your Plan.
At this point it is also important to consider distractions. There is a major difference between having 6 hours per day of uninterrupted time to watch the markets and having 6 hours of time during which you will be making and receiving phone calls, having meetings, and otherwise not being able to focus on the markets and make trades when required. In the former case one could day trade. In the latter, however, day trading would probably be a disaster as the trader would most likely miss important trading situations on a frequent basis. This sort of thing needs to be taken in to account.
The basic decision one has to make is in what timeframe the trader can reasonably expect to operate on a consistent basis. The individual must be able to do all the data gathering, research, market analysis, trade execution and monitoring, portfolio management, and any other functions required of her or his trading system. That means a trading timeframe has to be selected which allows the trader to handle all of these duties on a consistent basis without the kinds of disruptions which can cause poor system input from the user, and therefore poor system performance.
By the way, nothing says a trader cannot operate in multiple timeframes. The point of this assessment is really to determine the shortest timeframe realistically workable for the trader. He or she would then certainly be able to trade in ones longer-term than that base point. For example, just because one has the ability to day trade does not mean he or she cannot operate in a longer-term trade horizon.
One other thing to consider, especially where it relates to short-term activity such as day trading, is time of day. It is all fine and good if a trader has 8 hours of uninterrupted free time available during which to trade. What if that time is between 6:00pm and 2:00am Eastern, though? None of the primary US markets is open then, so the day trading options are a little thin for a US-based trader. (Forex might be an option).
It is also worth stating, as a final comment, that sometimes trading is not a good idea. We all go through spells in our lives when we are distracted by any number of things. This can be through illness, injury, family or relationship issues, or work-related stress. These tend to be temporary in nature, but nevertheless are a factor in our trading. If you cannot focus on trading the way you need to—and by that we mean following your plan—then no timeframe is going to be the right one. It's perfectly fine to take time off and not trade.
John Forman is author of The Essentials of Trading, and a near 20 year veteran of trading and analyzing the markets. For a free e-book on getting started in trading, click here.