|
Alpesh B. Patel is one of the UK's best-known traders and financial journalists. He writes a regular column for the Financial Times, has written seven bestselling books on trading, and makes regular television appearances for Bloomberg, Sky Television, Channel 4, The Money Channel, and the BBC. |
The Run Up To May
04/30/2004
For those of you who missed my free two hour investment talk on Thursday - here again is more of one of the most important things I discussed which I thought I would revisit the notion since it is so fascinating to so many.
- Assume 7 trades out of 10 are correct.
- Assume av. 20% return on correct trades: Only enter a trade if expect 30% return
- Assume max. 25% loss on incorrect
- ie. 0.7x20>>0.3x25
- Assume total original capital of £60,000
Value at Risk
- Assume £12,000 per trade
- Therefore risk per trade = 0.25x£12,000=£3000. ie.5% of original capital
- If max. 4 open positions at one time then max. Value at Risk = 4x£3000=£12,000. ie.20% of capital
- If av. 3 open positions then av. VAR = 3x£3000=£9000. ie 15% of original capital
Annual Profit Forecast
- Expected profit per trade (0.7x0.20x£12,000=£1680) - (0.3x0.25x£12,000=£900) = £780 net
- Therefore net profit margin = 6.5%
- And net annual profit = £780 x 30trades = £23,400
- ie. 39% p.a net return on original capital
Profit Optimisation Variables :
- # of trades per annum (assume constant)
- probability of successful trade (assume constant)
- percentage return for a correct trade (assume constant)
- personal ability to stop-losses (assume constant)
- return per trade (dependant on total capital)
Okay, so wy do so many traders fall so far short. Here are the key reasons :
- 1. They trade too often and so quality of trades drops meaning they do not hit 20% upside
- 2. They trade too often and so are not right 7 out of 10 times or even 5 out of 10.
- 3. They lack discipline to cut the loss when they should so their losses are greater
- 4. They do not have a system that is right 7 out of 10 times so end up trading willy-nilly and do not fit into the above plan
On the radar
Does Alan Greenspan want George 'The Bush' Bush to lose the US election or what; with talk about raising interest rates.
Well, I think the Americans will raise rates, the important issue is when? If not May then I reckon January post-election. Looking at UK stocks on my value-growth radar, it looks like Centrica, AMEC, Persimmon, Alliance Unichem and Ben Bailey - notice housebuilders and construction still up there. I think they will remain up there for a while longer.
|