## Saturday, February 10, 2018

### Annual Rate of Return and Holding Periods for Day Traders

Annual Rate of Return and Holding Periods for Day Traders

This question is question 16 in my excel finance function tutorial.   For the complete tutorial go here.

Question:   A person makes several stock purchases and places a stop-loss order at 96 percent of the purchase price and a sell a limit order at 104 percent of the purchase price.

Create a table that calculates the average annual return on the transaction for various holding periods under the assumption that a stock price either increases or decreases 4 percent?

What are the limitations of using average annual rate of return statistics to measure day-trading returns?

Calculation of Relationship of Annual Rate of Return on Holding Periods:

 Average Annual Rate of Return Statistics For Day Traders Holding Period Beginnning Date End Date Beginning Price End Priice XIRR Four Percent Gain 1 1/1/18 1/2/18 -100 104 164880228.8% 2 1/1/18 1/3/18 -100 104 128305.7% 3 1/1/18 1/4/18 -100 104 11713.8% 4 1/1/18 1/5/18 -100 104 3483.4% 5 1/1/18 1/6/18 -100 104 1651.6% 6 1/1/18 1/7/18 -100 104 986.9% 7 1/1/18 1/8/18 -100 104 673.0% 8 1/1/18 1/9/18 -100 104 498.6% 9 1/1/18 1/10/18 -100 104 390.7% 10 1/1/18 1/11/18 -100 104 318.5% 11 1/1/18 1/12/18 -100 104 267.4% 12 1/1/18 1/13/18 -100 104 229.7% 13 1/1/18 1/14/18 -100 104 200.8% 14 1/1/18 1/15/18 -100 104 178.0% 15 1/1/18 1/16/18 -100 104 159.7% Four Percent Loss 1 1/1/18 1/2/18 -100 96 -100.0% 2 1/1/18 1/3/18 -100 96 -99.9% 3 1/1/18 1/4/18 -100 96 -99.3% 4 1/1/18 1/5/18 -100 96 -97.6% 5 1/1/18 1/6/18 -100 96 -94.9% 6 1/1/18 1/7/18 -100 96 -91.7% 7 1/1/18 1/8/18 -100 96 -88.1% 8 1/1/18 1/9/18 -100 96 -84.5% 9 1/1/18 1/10/18 -100 96 -80.9% 10 1/1/18 1/11/18 -100 96 -77.5% 11 1/1/18 1/12/18 -100 96 -74.2% 12 1/1/18 1/13/18 -100 96 -71.1% 13 1/1/18 1/14/18 -100 96 -68.2% 14 1/1/18 1/15/18 -100 96 -65.5% 15 1/1/18 1/16/18 -100 96 -63.0%

Methodological Note:  The annual rate of return statistics for the various holding periods are calculated by inputting the cash flow range and the date range into the XIRR function.

Financial Discussion:

People who day trade can quickly report a large negative or positive annual returns.

In most cases the average annual return is not useful because the actual loss or gain is at most 4 percent and the money  will sit idly unless the trader quickly takes a new position

Do stop loss orders make sense?

The stop loss order assures that the maximum loss is 4 percent.  A trader takes all gains when there is a 4 percent increase in value and does not sell the losers she will end up with a portfolio of losers.

However, in many cases, a stock that falls 4 percent in value is a better value than when it was originally purchased.

Day trading is a tough game.

This is problem 16 in the Excel Finance Tutorial linked below:

http://www.dailymathproblem.com/p/excel-finance-functions.html