Stock Trading Benchmark

Submitted by Marco on 13 May, 2006 - 12:56

It's important to have some sort of benchmark when you are trading forex or stocks - or any other commodity. Setting a benchmark is like comparing yourself against the average in an exam. If you are higher than the average - you're an above average student. Lower than that mean that you're lower then your peers. It helps motivate you perform your best in your trading as well as keep you focused at what your target should be to make your trading worthwhile.

In my opinion, share traders should get at least 20 per cent return to make trading worthwhile. If you can't manage to get at least that level of return step back and reassess what you are doing with your trading.

So what should your trading benchmark be? It depends on your own situation of course. If you are using a high risk, high return strategy, then your benchmark return would be much higher than someone simply invested in a term deposit. When I first started trading I used the premium cash deposit rates as a benchmark. The overnight cash rates were at 5.5% at that time and ING Direct was offering 5.4 per cent per annum. return on cash deposits, paid monthly. This wasn’t an effective strategy.

In my opinion, share traders should get at least 20 per cent return to make trading worthwhile. If you can't manage to get at least that level of return step back and reassess what you are doing with your trading. (Otherwise just stick your money in a managed fund or just trade an index) Successful market traders can make any amount of money - depending upon the amount of capital they put in and the level of risk they are willing to put in. It’s up to you to determine what your benchmark is, and when you set it take into account the level of risk you are taking in your trades.

For now, trading stocks on the Australian Stock Exchange, the All Ordinaries index would be a general rule of thumb to use as a benchmark for your stock trading. You can also use sector indices, such as resources and telecommunications as trading benchmarks.

In forex trading, my benchmark would be the overall dollar movement in the time I was trading multiplied by a factor depending on my involvement with the market. For example, the dollar moved 150 pips positive in one week and I was watching the forex market for 4 hours. There are about 5.5 days of trading in forex a week, or about 132 hours. Your starting benchmark could be 4 / 132 hours * 150 pips = 4.5 pips. The value may seem low as a benchmark, so may want to tweak the benchmark to account for the daily fluctuations. So taking the absolute value of each market open and close price (realizing that you can make money on an up or down price movement) of the currency pair you calculate a total accumulated pip movement of 450 pips in the week. 4 / 132 * 450 pips = 13.6 pips.

Another benchmark you could possibly use is the number of hours you watched the forex spot prices going up and down and executing your trade against the average $100,000 per annum salary which works out to be just less than $50 per hour. Setup your benchmarks!

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