NIFTY Expected Returns for Different Trading Time Scales

monthly-dividend-portfolio-reviewI presented a long term view about expected return for SENSEX. I mentioned that the compounded expected return was 12.1%, while the arithmetic average was 16% per year.

Today, I am discussing the short term perspective using a NIFTY index. Similar calculations can also be done using SENSEX, but I believe NIFTY is a better representation. I calculated daily returns, weekly returns, and monthly returns for NIFTY from August 2002 to May 2009. In all three cases I have used average closing value on a given day, given week, and given month. The table below shows the summary for these results.

NIFTY Market Returns

NIFTY Market Returns

You can see that how the chances of negative returns tend to reduce when the duration of trade increases.

  • For the time period used in this calculation, 47% of the time daily returns are negative, 44% of the time daily returns are less than 2%, and only 9% of the time daily returns are more than 2%.
  • However, when we look on monthly basis, negative returns reduce to 32% of the time, while 59% of the time monthly returns are more than 2%.

In addition, more enterprising and inquisitive readers can look at the graphical plots below in which I plotted:

  • Histogram to show the distribution of the data; and
  • Scatter diagram to show the randomness over a period of time

These plots also show a similar trend as summarized in table above.

  • I am actually surprised that the histogram shows a very narrow distribution for daily returns. I am also very confident that this curve will pass statistical hypothesis testing to show it is statistically a normal distribution. However, I want to keep it simple here for ease of understanding.
  • The histogram for weekly returns is skewing towards ‘less than 2% returns’.
  • Monthly returns do not have any distribution. I do not know whether lack of distribution is good or bad. However, you can observe that the majority of the time there are positive returns i.e. occurrence of 2% or more returns is quite often.

Market Returns : Different Trading Scales

Market Returns : Different Trading Scales

Summary…

The purpose of my sharing these results is to bring out the expected returns from the market based on daily, weekly, and/or monthly trades. These are based on NIFTY index. These results can be interpreted in multiple ways because each individual has its own way at looking at number (glass can be half full or half empty).

Every individual is free to expect more than 2% returns on daily trades. However, you must realize that there is only 9% chance that you will get your more than 2% return. In addition, there is 47% chance that you returns are likely to be negative. If you are willing to take that risk, then go for it.

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Another individual can target for more than 2% returns, but decides to use monthly trading window. This way the chances of getting your desired returns are increased to 59% (instead of only 9% chance using daily trades).

Many readers and users alike may say that with proper stock picks individual stocks can return 10%, 20% or even more. I agree with them, and I do not deny the possibility of such high returns in short time period. However, the point I am making here is what are the “chances” of such high returns? Sure, individual stock picks can have high returns, but chances become very low. For example, individuals can surely attempt to target 5% or more returns on their daily or weekly trades. But then, they should accept the fact that chances are less than 1% and they are taking more risk than the market itself.

Everybody talks about high risk, low risk, or medium risk. In absence of a quantifiable number, it becomes very subjective to make a judgement call. There are a lack of guidelines which individual investors like you or me can use to make a judgement call. Just saying it is high risk, does not help us. It is very subjective.  Therefore, if an individual is interested in trading, the emplirical numbers I presented here can be used as a guide to put certain level of expectations. It helps you understand your risk-return scenarios. It helps you quantify the “risk”.

Disclaimer: These are empirical statistical derivations and should be only used as helpful guidelines. They only demostrate historical perspective. These are not trading rules. These derivations do not consider any fundamental basis for expected returns.









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16 Responses to “NIFTY Expected Returns for Different Trading Time Scales”

  1. Manish says:

    Nice post

    The statistics reveal another important fact that when we trade for short term , we must have more wider focus and should not see markets in extremelly short time frame .

    The only thing i am amazed to see is how daily and weekly histogram show more of binomial kindaof distribution , where as monthly one is scattered with all kind of returns :) .

    Nice Job is collection of data and it shows the hard work . Good work :)

    Manish
    http://www.jagoinvestor.com

    • TIP Guy says:

      Manish,

      Thanks for the note. I agree that monthly returns are scattered.

      However, monthly returns are skewed towards more chances of positive returns

  2. How is the return calculated? For example for the monthly return when was it bought and when was it sold? I am assuming that the answer is: bought at the beginning and sold at the end. Am I right?

    I interpret the analysis as that the chance of +ve return is higher in positional trading than in swing trading than in day trading.

    I wrote three notes recently on positional trade opportunities, here, here and here.

    If you have time to browse and comment, I would be very grateful.

    • TIP Guy says:

      Student,

      Returns are calculated based on average monthly closings. Timing is not considered, because it is very subjective. Supporters will pick good ones, and naysayers will pick bad ones.

      For daily it is straight forward. For weekly and monthly, it is important to avoid biasing of first and last day the month. I have looked at different time zones, e.g. 1st and last day, average of first week and average of last week, overall first monthly average vs. overall second month average, etc.

      No matter how you look at it, the results are similar and do not show noticeable difference.

      Thanks for referring to the link. I will look into all three, and see if can make a comment.

      Best Wishes,

    • TIP Guy says:

      Hello Student,

      I do not know much about swing/positional strategies. I will leave this to you for nomenclature. However, it looks like you are referring “positional strategy” to a strategy where you wait for little longer time frame.

      If you have any hardcore trading data for positional strategy, then you may compare it to the statistics that I had presented and see if it makes sense. Whether your time frame is weekly or monthly, it will most likely have different expected return levels.

      Yes, going by your nomenclature of positional strategy for trading, I agree “chances” of positive returns tend to be higher.

      For some strange reason, I could not post my comments on your blog. So posted my response here.

      Best Wishes,

  3. M Mansuri says:

    I am assuming these charts are for market trading returns only and does not include the actual return a trader or investor gets at the point of sale or completion of transaction.

    I have read and observed much higher returns on daily trading. Does this chart mean that all the claims of 5, 8, 10% returns that brokers or advisors claim are bogus and not possible? I am trying to understand how should I intrept these charts and it possible, how to related to trading?

    • TIP Guy says:

      Mansuri,

      (1) Yes, these are expected returns from trading only, and does not consider complete transactions.

      (2) I do not discount brokers or advisers claiming 5, 6, 10% returns. It is certainly possible to get that kind of return. However, the probability and consistency of those returns are very low. My personal viewpoint is trader/advisers do get such returns once in a while, and they keep drumming it every time.

      Best Wishes,

  4. Ranjan says:

    I showed this chart to my sub-broker and he trashed it. overall i have been happy with my sub-broker as he has given me some good stock picks. according to him all this is theory and does not work. our daily trading calls have been mostly 4% or more. any comments on theory vs. actual practice issue?

    • TIP Guy says:

      Ranjan,

      I mentioned in one of my response above, I do no discount or ignore brokers getting higher returns. The point I am trying to make in these charts is, the probability and consistency is lower.

      If your broker is giving you stock picks with consistently 4% returns of daily trades, then I would question why he is interested in giving calls. Why does he not trade for himself?

      Best Wishes,

  5. I support Tip Guy totally .

    To add to this , if a broker claims of 4% returns on daily trades , thats is 50% of what you can get in a FD for a year . which means you are getting 180 times of risk-free returns . Does that sound feasible by any means ? Once in a while is ok , or even in a good week . But every day consistently for a very very long term , Definately no !! .

    Also why take 4% , just talk about 2% returns daily (consistently over long term) . If you start with 1 lac today and start getting even 2% daily. It would be 1445 CRORES in 3 yrs (600 trading sessions) . Now i dont know about maths or logic or what is possible in this world !! . But come on !! , 1445 crores from 1 lac assuming 2% returns daily (half of what is claimed !!) .

    Either broker is new to market or the person who beleives him .

    Manish
    http://www.jagoinvestor.com

  6. Hi TIP,
    I read this article today, and this is what i think Buffet was doing in his partnership days. if you see his letters carefully initially he used to give details about the trades. like “Last year what we thought to be a good opportunity has turned into wonderful opportunity, we sold Sanborn Maps for xxx price..”. I figured out that that time his positional time window was around 12 to 18 months.

    From my experience Since last year i am able to get 5-7% returns quarterly..my avg waiting timeframe was 3 months. and I could recover all my 2007-08 losses by positional trading.

    Best Wishes.

  7. TIP Guy says:

    MIP,

    If the positional trading strategy works for you, then nothing wrong in it. In the end, we all want to make some money, isn’t it. Wihtin legal framework, it does not matter which strategy one adopts. The key is consistency and sustainability.

    Best Wishes,

    • Yes, I agree with you strongly on consistency & sustainability. This is the only thing we need to learn. Buffet’s Buy & Hold means this only. If i manage to find out 3-4 opportunities per year, which will give me at least 5% returns then also I am ok with that. But we never work like that. No matter what is prosperous market ahead is, you should be waiting patiently for your pray.

      Suppose you get 40% return on one position, would you liquidate all your holding and go home? because that 40% is much more than buffets 22% avg right? you don’t say like “I got years quota now i will put all my principle & profit in bank FD, and will open next year…” There comes patience & sustainability.

      Thanks

  8. kora says:

    brilliant ! .. just realized a scatter plot can be drawn with one variable ! ROFLOL ….

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