So… you’ve learned a bit about compounding, risk, fractals, and expectancy.
Now I’d like to introduce you to a concept I developed for myself that ties each of these concepts together… TAOST TRT™. The acronym stands for Time, Return, and Turns.
And it’s the key to my trading approach.
One of the biggest reasons that I moved from “fundamental” trading to swing trading and eventually to day trading was because I felt time constrained. Not constrained in the traditional sense, but constrained in that all I could do was wait for days, weeks, and months to pass in order to get the return I sought.
That was fun.
Have you been there? You buy a stock (or an option) and it works… but it takes 3 months to return 12%? I know the talking heads tell you to buy, hold and wait so time can automatically do its thing… cause your money to compound.
I’m here to tell you that it won’t.
Not automatically anyway.
Long term holdings can’t compound. They have what’s called linear growth (assuming they’re going up) as opposed to geometric growth.
Put another way… If you never take ownership of your profits and redeploy them, you can’t make money on your money… also known as the essence of compounding.
That’s the T in TRT™… Time is 1 component of the trilogy.
Now for the R… Return… that pesky, elusive, but required to make any money at all part of the equation.
If you ask most people whether they prefer a 100% return or 5% return, 99% will tell you that they prefer the 100% return… no matter what.
They’re right… given their knowledge and experience…
And wrong in reality.
Especially when you add the last component T for Turns.
Turns refers to the number of iterations of a profitable activity you can complete in a given timeframe. As you might guess, for a trader that means the number of trades you can complete.
So how does all of this fit together?
Glad you asked.
In traditional, long term trading TRT™ looks like this…
Initial account balance = $1,000
T = 1 year
R = 100%
T = 1 turn
You guessed it… if you can return 100% 1 time in 1 year, your account doubles to $2,000.
Not bad… if you can find that double.
Now, let’s have a look at the same year through the lense of a day trader…
Initial account balance = $1,000
T = 1 year
R = 0.50%
T = 200 turns
Now things get pretty interesting. The nominal return is still a double. However, the compound return gets you to $2,711.52.
And did you notice that was ½ of 1% per turn?
Yeah, I know you remember that from a previous lesson… and well you should.
The point is 0.50% is better than 100%... and easier to achieve.
Put that in your peace pipe and smoke it.
