Clearly, any person who trades does so with the expectation of making profits. We take risks to get rewards. The question each and every trader should answer, however, is what kind of return does he or she expect to make?

This really is an extremely important consideration, as it speaks directly to what kind of trading will take place, what market or markets are suitable to the purpose, and the types of risks needed.

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Let s start off simple. Suppose a trader would like to make 10% per year on a really consistent basis with small variance. There are a number of options out there.

If interest rates are sufficiently high, the trader could basically put the funds in a fixed income instrument like a CD or a bond of some kind and take relatively little risk.

A trader seeking 100% returns every year would have a very different situation. This individual will not be looking at the cash fixed earnings market, but could do so via the leverage offered within the futures market.

Similarly, other leverage based markets are a lot more likely candidates than cash ones, perhaps which includes equities. The trader will almost certainly require higher market exposure to accomplish the goal, and most most likely will have to execute a larger number of transactions than in the previous scenario.

As you can see, your objective dictates the methods by which you achieve it. The end surely dictates the means to a terrific degree.

There's one other consideration in this particular assessment, though, and it is actually one which harks back to the earlier discussion of ability to lose.

Trading systems have what are commonly referred to as draw downs. A draw down is the distance (measured in % or account/portfolio value terms) from an equity peak towards the lowest point immediately following it.

For instance, say a trader's portfolio increased from $10000 to $15000, fell to $12000, then rose to $20000. The drop from the $15000 peak to the $12000 though could be deemed a draw down, in this case of $3000 or 20%.

Each trader must establish how large a draw down (in this case commonly thought of in percentage terms) he or she is willing to accept. It really is very much a risk/reward decision.

On one extreme are trading systems with very, very small draw downs, but additionally with low returns (low risk - low rewards). On the other extreme are the trading systems with large returns, but similarly substantial draw downs (high risk - high reward).

Of course, each trader's dream is really a system with high returns and small draw downs. The reality of trading, however, is often less pleasantly somewhere in between.

The question may be asked what it matters if substantial returns is the objective. It is quite simple. The more the account value falls, the bigger the return necessary to make that loss back up.

That means time. Large draw downs have a tendency to mean long periods among equity peaks.

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