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.

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

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