Do you trade for an income or for a compound effect?
- Thread starter danielc1
- Start date
You can’t compound and trade for income. The definition of compounding is that you use your gains to generate more gains. The definition of income is you take the income out to spend. Any money you take out isnt being used to generate more gains.
I guess the best to achieve best of both world is by having a diversified basket of strategies to generate smoother return streams. With smooth return streams, you can treat it like as an ATM to withdraw at periodic frequency. What's left undrawn, can be used for compounding.
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I do 3 things:
- I do compound till a certain amount is reached
- I take sometimes money to spent when I want
- I withdraw money to put somewhere else if the amount becomes too big. Invest somewhere else or open another trading account with another broker to spread the risk of insolvency of the broker. Learned that after being client at Refco years ago.
I trade for compound effect, however as trading pays for living expenses there is continual money being pulled out the account nearly as quick as it goes in.
The stocks I trade, the majority are small cap growth types and pay no dividend.
Trading methods continually morph, once upon a time I would hit quite large size, these days I go in small but a large number of positions but being very selective on quality and entries and holding longer.
The approaches are different when you are seeking income (swing trading) vs wealth (trend following). Nothing stops you from doing both if you understand the market structure and how to approach it properly, paying attention to risk management and position sizing in addition to using stop losses. I trade for income since, I am retired but, now have alloted a portion of my trading capital to wealth building (trend following). Both approaches are similar in that they seek to take advantage of the trend. One, uses short term trends, the other uses longer term trends.
Perhaps the original question is poorly worded:
maybe he meant “do you compound your returns or do you sweep your gains out (keep your trading capital constant).”
if that’s the question, the factors that would
Determine if you sweep or compound would be: 1. Is your strategy is scalable; 2. Is your strategy too negatively skewed.
maybe he meant “do you compound your returns or do you sweep your gains out (keep your trading capital constant).”
if that’s the question, the factors that would
Determine if you sweep or compound would be: 1. Is your strategy is scalable; 2. Is your strategy too negatively skewed.
If it's negatively skewed, you should definitely withdraw from it periodically.
That is correct
I believe it is a choice if you go for an income or compound and it should not be dependent on your strategy. Your strategy should depend on your choice of income or compounding.
So if it is a choice, what do you prefer?
Do you have an example of a strategy that is negatively skewed that would make it worth to trade it? I believe every strategy that is worth trading must have a positive skewed reward/risk.