Do not let the percentage of return deceive you
When it comes to investment the very first question people will ask is the percentage of return. Most people will stop there. They will feel not interested if the percentage is too low or too excited when the percentage return is high and invest straight into the financial product. The fact is return in investment it is just a portion of the consideration.
When it comes to trading the market it is particularly easy to get a 100% return a month. By looking at the return itself do not explain the entire picture of the financial products. Some of the important factors include:
- The history of the performance: In this area, we are looking at history if possible. For example, if the system tested since 1929 until today is better than a fund just started in the year 2015.
- The maximum drawdown: There is no free lunch in this world, normally high return often comes with higher drawdown, inconsistency and may not survive during a market crash. A better way to determine a good return of a financial product often considers the drawdown. If a system has a 20% return and drawdown of 50%, this tells you that every $100 you invest you are risking $50 to gain $20.
- The concept of the system: By having a sound concept of a trading system will be one of the ways to determine if the system will consistently generate the same return in the future. If the system is a discretionary trading system, it will very much depend on the trader’s experience, compare if the system is based on a statistical probability system then we will foresee a much predictable outcome in the future. Not to mention if it is a discretionary trading system for another person to learn and master the skill becomes more difficult.
- Trading or Investment capital: Trading a small capital often easy generate a higher return because there is plenty of option where you can invest your money and execution of your trade is straight forward, you can get in and out of the market anytime. For bigger investment capital have fewer options and high return like 100% may not achievable.
As you can see there are many other factors to consider a trading system. If you solely looking at the return itself is rather shallow. The above factors more on evaluating the trading system, not to mention there are other individual factors such as personal investment objective, risk tolerance, and current financial situation.
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