Average Holding Periods (Stocks)
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So_Cynical
The Contrarian Averager
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People do what is easy, very very easy to buy and sell now.
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On some comments I read on TheAge or HotCopper, it seems like their timeframes are days / weeks, not even months and complain when one day the SP doesn't follow something that happened 2 hours ago.
And even broker reports timelines are for no more than 6 months or so. In fact I don't think I've ever read one that suggests a 5 year time frame, even though most financial products on the ASX (Funds, Stocks, ETFs etc...) suggest 5+ years.
I've also read a financial advisor say, it's unusual for them to advise clients to do nothing for a while.
Having said all that, I'm happy that's the case as it's harder to beat someone over 5+ years, when more people want to win every week or month or 6 months.
And even broker reports timelines are for no more than 6 months or so. In fact I don't think I've ever read one that suggests a 5 year time frame, even though most financial products on the ASX (Funds, Stocks, ETFs etc...) suggest 5+ years.
I've also read a financial advisor say, it's unusual for them to advise clients to do nothing for a while.
Having said all that, I'm happy that's the case as it's harder to beat someone over 5+ years, when more people want to win every week or month or 6 months.
Value Collector
Have courage, and be kind.
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I couldn't tell you the last time I bought a stock where the plan was to hold it for less than 3 years, I generally buy with the hope that the company is going to continue producing good returns for the more than a decade.
I think my shortest holding period for a stock in recent years was about 12 months, and I regret selling it.
I think my shortest holding period for a stock in recent years was about 12 months, and I regret selling it.
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I have done a lot of research into the relationship between the risk of a trading system and the profit potential of that system.
Every trader has a personal risk tolerance, and can define a statement of personal risk tolerance. For example:
"I am trading a $100,000 account, and will forecast two years into the future. I want to hold the probability of a drawdown greater than 20% of the value of my account to a chance of 5% or less."
Position size is very important in achieving maximum account gain. For systems that have a positive expectation (and all of the systems we trade have a positive expectation -- we would not trade them if they did not), account growth increases as position size increases. Drawdown also increases as position size increases. It is possible to compute the maximum position size for a given risk tolerance (for a specific trading system or even a hypothetical set of trades). I call that position size "safe-f." When comparing two alternative uses of funds -- such as two alternative trading systems, compute the safe-f position size for each. The two results are then "risk-normalized." Since the risk is the same, we should prefer the one with the greatest profit potential. A useful metric of profit potential is the compound annual rate of return taken at some point in the distribution of profit -- say the 25th percentile -- where we can call that metric CAR25 (Compound Annual rate of Return at the 25th percentile). If CAR25 is less than the return that could be achieved from a risk-free use of the funds, the system is not worth trading.
All of that is in preparation to explain the results I have found. Risk-normalized profit potential decreases as:
trading accuracy decreases
holding period increases
The sweet spot (highest risk-normalized return) for most trading systems is high accuracy -- 65% or higher -- and short holding periods -- a few days.
So the results shown in the chart reflect the behavior of traders as the methods they use reward trading methods that are most profitable for a given level of risk.
One of my YouTube presentations is "The Four Faces of Risk":
https://www.youtube.com/watch?v=Vw7mseQ_Tmc
Best regards,
Howard
Every trader has a personal risk tolerance, and can define a statement of personal risk tolerance. For example:
"I am trading a $100,000 account, and will forecast two years into the future. I want to hold the probability of a drawdown greater than 20% of the value of my account to a chance of 5% or less."
Position size is very important in achieving maximum account gain. For systems that have a positive expectation (and all of the systems we trade have a positive expectation -- we would not trade them if they did not), account growth increases as position size increases. Drawdown also increases as position size increases. It is possible to compute the maximum position size for a given risk tolerance (for a specific trading system or even a hypothetical set of trades). I call that position size "safe-f." When comparing two alternative uses of funds -- such as two alternative trading systems, compute the safe-f position size for each. The two results are then "risk-normalized." Since the risk is the same, we should prefer the one with the greatest profit potential. A useful metric of profit potential is the compound annual rate of return taken at some point in the distribution of profit -- say the 25th percentile -- where we can call that metric CAR25 (Compound Annual rate of Return at the 25th percentile). If CAR25 is less than the return that could be achieved from a risk-free use of the funds, the system is not worth trading.
All of that is in preparation to explain the results I have found. Risk-normalized profit potential decreases as:
trading accuracy decreases
holding period increases
The sweet spot (highest risk-normalized return) for most trading systems is high accuracy -- 65% or higher -- and short holding periods -- a few days.
So the results shown in the chart reflect the behavior of traders as the methods they use reward trading methods that are most profitable for a given level of risk.
One of my YouTube presentations is "The Four Faces of Risk":
https://www.youtube.com/watch?v=Vw7mseQ_Tmc
Best regards,
Howard
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Short holding period simply mean that information are now cheaper to obtain and that the market is more liquid.
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I'm probably the opposite, I look far into the future, and end up in these places for some mental stimulation to pass the time.
I've been waiting out stocks and strategy for 2-3 years (triggers like Interest Rates, Australian Housing, U.S Valuations etc) and am anticipating it may take another similar period of time before I can pull the trigger.
If my research and gameplan tells me it's not the right time, then I'm happy to delay gratification for 5 years, to make a decision that will last me 50 years.
I've been waiting out stocks and strategy for 2-3 years (triggers like Interest Rates, Australian Housing, U.S Valuations etc) and am anticipating it may take another similar period of time before I can pull the trigger.
If my research and gameplan tells me it's not the right time, then I'm happy to delay gratification for 5 years, to make a decision that will last me 50 years.
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