3. Return per trade
4. Average return per trade
5. More about average return
8. Risk of trading
9. More about risk of trading
10. Correlation coefficient
11. Efficient trading portfolio
This publication is for short-term traders, i.e. for traders who hold stocks for one to eight days. Short-term trading assumes buying and selling stocks often. After two to four months a trader will have good statistics and he or she can start an analysis of trading results. What are the main questions, which should be answered from this analysis?
No doubt it is better to ask these questions before using any trading strategy. We will consider methods of estimating profitability and risk of trading strategies, optimally dividing trading capital, using stop and limit orders and many other problems related to stock trading.
Consider two hypothetical trading strategies. Suppose you use half of your trading capital to buy stocks selected by your secret system and sell them on the next day. The other half of your capital you use to sell short some specific stocks and close positions on the next day.
In the course of one month you make 20 trades using the first method (let us call it strategy # 1) and 20 trades using the second method (strategy # 2). You decide to analyze your trading results and make a table, which shows the returns (in % ) for every trade you made.
Which strategy is better and how can the trading capital be divided between these strategies in order to obtain the maximal profit with minimal risk? These are typical trader's questions and we will outline methods of solving them and similar problems.
The first thing you would probably do is calculate of the average return per trade. Adding up the numbers from the columns and dividing the results by 20 (the number of trades) you obtain the average returns per trade for these strategies
Does this mean that the second strategy is better? No, it does not! The answer is clear if you calculate the total return for this time period. A definition of the total return for any given time period is very simple. If your starting capital is equal toC0 and after some period of time it becomesC1 then the total return for this period is equal to
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