Selecting a target return ?

In finance theory there is a rule of thumb called the rule of 72. Under this rule if you divide the annual interest rate of your loan into 72 it approximates how long it will take to pay off the loan. Thus if the loan was at 6% p.a. it would take roughly 12 years to pay it off.

If we look at this rule as an investment then the interpretation would be you would double your money in 12 years.

Now if we use the rule for our trading, a monthly return of 6% would indicate that it would take 12 months to double our equity. So what monthly target ROI should we aim for to double our money?

As a starting position lets work backwards from our targeted 6% :

• Target after tax and risk reward adjustment :6%
• Assuming 30% tax (0.06 / 0.7) : 8.57%
• Now adjust this pre-tax return by 50% Risk Reward ratio (8.57 / .5) :17.14%
  

On this basis we should try to stay in our trades until we achieve a targeted 17.14% ROI so that the post tax return gives us 6% and helps us double our equity within a single trading year.

Cheers