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?

What do these statistics suggest about the risk of day trading?

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.




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