Trading Profits
The risk free rate of return for most traders should be something like a cash management account return. That will give you the return for your capital from zero risk passive investment. Say the return is 6% per annum. If you are not getting that return on your trading capital, you are immediately doing something wrong. You should not be trading.
If you get a 7% return, you should not be celebrating. You are spending time and making trades, only to earn 1% over the risk free rate. Also, your equity curve will probably be a lot bumpier than that from a cash management account.
Professional traders are rewarded on the basis of being able to offer the highest return for their given risk profile. This is measured using the Sharpe ratio.
The point is that as a trader you are taking on more risks. You should at least be rewarded for those risks and you need to constantly measure your risk versus your returns. If they don’t measure up, evaluate your trading skills.
Summary
Understanding that trading is not about one off profits, and measuring them on a realistic long term basis against other investments is important to your development as a trader. The alternative may make you feel better for a while, but rob you of the opportunity of greater returns in your trading account.
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Tags: trading profits