When formulating a stock trading strategy, one must carefully consider the matter of capital turnover and its impact on ROI as it relates directly to both dollar profit and time. What is capital turnover? The average length of time that capital is tied up in a trade is the capital turnover. It is usually expressed in days and often as capital turnover ‘time’ or ‘rate’. Another way to look at it is the number of days from the entry of a trade to exit when it becomes available again, or how long it takes to ‘turn the capital over. It is an essential business metric when considering the desired profits for a trading business, in addition to being key to an optimum balance between one’s hourly pay and ROI as they relate to the overall stock trading strategy.
In devising a stock trading strategy, the goal is to maximize one’s ROI. Thinking that turning one’s capital over as frequently as possible is best, traders often err in considering only the dollar aspect of ROI and not that of one’s time investment. Trading capital is turned over almost immediately for day traders. Over the course of a year, this short turnover time offers a high frequency and high number of capital turnovers. Short, medium and long term trading may have a longer turnover time, but allow the trader the possibility of a much lower time investment.
Return on one’s time, or hourly pay, is an important consideration of the stock trading strategy, just as it is in any self-employed occupation. Expecially when the business will be matured, return on one’s time can not be overlooked. Financial freedom plus freedom of time is why most people enter trading. One without the other does not provide a desirable quality of life. Both are necessary.
Let’s look at an example. A person might choose day trading as the core of their stock trading strategy because with the short capital turnover time, they could possibly realize an ROI of 25% or $5,000 on a $25,000 account. Their hourly pay is only $21,28 if they are working 50 hours a week. A medium term trader who can afford to trade a more selective system since they are looking for fewer opporunities, might realize a lower ROI in dollar terms, say only $3,000 or 12%, but only investing 15 hours per week. The hourly pay for this trader would be $46.18, or more than double that of the day trader.
Time investment versus the dollar return is the primary difference. For a given account size, the capital turnover time dictates the number of opportunities that can be taken during a given period of time, so it is also related directly to the ROI. Care must be taken in selection of one’s strategy because the different strategies also determine the required investment of time. To ensure that the hourly pay is acceptable with a chosen strategy and particularly system, backtesting and analysis must be conducted to ensure an adequate winning percentage and profitability. A business-smart trader will optimize their ROI for both money and time through proper analysis, measurement and calculation of the various performance metrics of a given stock trading strategy.
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