Sunday, August 5, 2012

Small daily improvements lead to genius level achievements.


There was a consensus, that mutual funds give about 16% returns on investments, and if held, for a long period even tax is exempted. Then the overall returns will be close to real returns, interest rates plus inflation. So, what is the fun in expending so much energy on trading, when it is also going to give about 20% returns, which is invariably taxable?
Can we produce better returns that 20% per annum, because it justifies claims, that with an added effort put on any activity should give back more in return. So, a thought of scaling up the returns to 30% was a choice. At first giving an assurance to get 30% returns was a little challenging, but a little deeper thought gave some solutions. When put the same on paper it showed great clarity.
A 30% return per annum when broken down to monthly returns, we need 2.50% per month. Looks like, not a big target though. Let’s break it a little further, what will be the required weekly gains? A 0.60% return per week would fetch 2.40% per month, close to our target. This number looks interesting, right? Yes, 0.60% per week as profits out of the ocean of opportunities available, from the universe of stocks listed in our exchange is a small target to achieve. And this would transform into an amazing 30% yearly returns.
Done on a consistent basis, compounding similar returns on a lakh of investment for 25 years, the magic number is 7.10 crores. Isn’t it astonishing? 7.10 crores from, an investment of 1.00 lakh in 25 years. So, big goals or chief aims of our life, when broken into miniscule parts, you get out of the doubts about achieving it. A 0.60% profit on a weekly basis would mean just a single trade, well researched, taking a risk of 1% on your capital. We take an assumption that over a bunch of trades, with some giving double the risk as profits, some returning just as much the risk exposed and some closing at a loss. A trade can come up with wonderful strength, but going forward can get weak before reaching its target area, requesting for attention to close it early, before target reach, such trades among our real time trade records show about 0.50 to 0.75% rewards to risk exposed.
Not all the trades that come up in your trading system are going to be a similar trade like the one described above. You can get few trades that return more than 2 times the risk exposed and some can get stopped out too. So, on an average assume that you have 30% of your trades giving 2 times reward on the risk exposed, 30% of trades give one time the risk exposed as profit, another 30% hits stop loss and the balance 10% closes at break even. This can be a fairly good distribution of trades and is what we face in reality too. The resultant number is 60% reward on the risk exposed. The calculation goes like this, for an account with a capital of 1.00 lakhs, 1% risk will be Rs. 1000. 10 trades, with a risk of 1000 each means 10000 is put at risk. Out of that 3 trades are losers, which lose 3000. 3 trades are winners with one time reward, which is 3000 gains, 3 trades, are winners with 2 times reward, which is 6000 and the balance one trade breaks even giving nothing, only effort. The resultant total is 6000 +3000 – 3000 = 6000. For Rs. 10000 put at risk, we have managed to book Rs. 6000 as reward, which means 60% of risk exposed is got back as reward. So a 0.60% per week profit with one trade on an average basis is a very easily achievable target.

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