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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