Sunday, March 12, 2006

Trade Analysis

Most people probably don't analyse their investment performance as much as I do. My motives are to find what works and see whether I can viably some day be self-employed as a trader-investor. Over time my investments have made money and beaten the relevant indices while my trading has lost me money. The question is: Am I improving? and: Which kind of trades are profitable for me?

Using the spreadsheets that I set up for the Schedule D of my tax returns in the last two years I computed the rate of return on each trade held for less than a year - just gain or loss divided by cost of investment. Overall I found that there was a negative correlation between period held and rate of return! Looking at just day trades they on average returned 0.78%. Those this year have averaged 1% and there is a correlation of 0.33 between date of trade and rate of return. So I am profitable and learning on day trades.

I am usually trading about $30000 or 10% of my net worth on each day trade. A 1% rate of return is $300 per day or $75000 a year which is my current salary. So if I can maintain that over time (this sample is just 42 day trades), it would be a viable occupation.

Longer trades lost money. However, when I excluded the worst two trades that happened last year, the return was a little greater than 1%. The correlation with date was zero. So I am not learning there... but if I can exclude these worst disasters by setting some kind of wide stop on trades I should be able to make money on that too.

I also separated out option trades. These also lost money. But excluding the three worst where the option expired worthless they earned close to 2%. Key here also seems to hold for a short period, though probably more than a day. I have never day traded an option.

If you are an active trader have you tried analysing your trades? It's one good use to put the Schedule D to!

1 comment:

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