Defining Trading Expectations

Joaquin Narro and Monica Caamano

Trading expectations depend on the circumstances. What may be a satisfactory trading expectation for a stand-alone, new proprietary trader may not be so for the proprietary trading book of a trader who also sees significant institutional flow. Ultimately, trading expectations should at least match what can already be achieved, whether internally or externally. This is what we call benchmarking. We consider two intrinsic elements when defining trading expectations: return and risk, with special attention paid to incorporating maximum loss into our analysis. Out of all the strategies developed, we only choose those that satisfy our expectations for trading.

To facilitate discrimination between strategies, we start by differentiating between “experienced” and “inexperienced” environments.

• • Experienced environment: We define an experienced environment as one where we have pre-existing, real historical performance data – for example, the existing energy trading desk of a utility or bank.

• • Inexperienced environment: An inexperienced environment would be the opposite – ie, one where there is no pre-existing performance data. Trading expectations would be