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.
This is problem 16 in the Excel Finance Tutorial linked below:
http://www.dailymathproblem.com/p/excel-finance-functions.html
This is problem 16 in the Excel Finance Tutorial linked below:
http://www.dailymathproblem.com/p/excel-finance-functions.html
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