Is the goal of trading signals to pursue absolute returns or relative returns?

In the realm of investments, trading signals as a trading strategy are typically designed to assist investors in realizing profits. However, investors often confront a fundamental question when employing trading signals: are they truly pursuing absolute returns or relative returns?✨

Understanding Absolute and Relative Returns

1. Absolute Returns:
Definition: Absolute returns refer to the actual profit from an investment over a specific period, without consideration of market conditions or any benchmark. In essence, absolute returns emphasize the actual returns that investors gain from their trades.
Objective: To enhance the net value of the investment portfolio and ensure profitability. Regardless of market conditions, investors aspire to achieve positive returns.

2. Relative Returns:
Definition: Relative returns represent investment performance in relation to a certain benchmark (such as market indices or other investments within the same sector. Relative returns largely depend on the benchmark chosen by the investor.
Objective: To strive for aboveaverage performance among peer investments during market fluctuations.

Analysis of the Goals of Trading Signals

1. Absolute Returns:
Advantages: Capable of generating profits even in declining markets, making it suitable for riskaverse investors.
Method of Achievement: By making timely buy and sell decisions, capturing shortterm trading opportunities to realize actual capital appreciation.

2. Relative Returns:
Advantages: Allows for the evaluation of the performance of investment managers or strategies through comparisons of segmented markets or specific funds, making it particularly useful for investors seeking excess returns in extreme situations.
Method of Achievement: Establishing clear benchmarks and achieving performance exceeding those benchmarks through strategic trading.

How to Choose the Goal

1. Investor's Nature:
Assessing one’s risk tolerance will determine whether to pursue absolute or relative returns.
For instance, if you wish to maintain steady profits regardless of market volatility, you may lean towards an absolute return objective.

2. Market Environment:
In a bull market, pursuing relative returns might be more suitable; whereas in a bear market, strategies focusing on absolute returns become particularly crucial.
Flexibly adjusting strategies to adapt to changes in the market ensures that returns remain positive.

3. Investment Objectives:
Clearly defining personal shortterm and longterm investment goals is essential. To achieve financial independence, objectives focused on absolute returns may hold greater significance; while goals pertaining to specific asset allocations might prioritize relative returns.

Case Study Reference

Consider an investor who opts for trading signals in a volatile market environment, targeting absolute returns. This investor would concentrate on the actual returns of each trade, utilizing technical analysis and market sentiment to actively buy and sell stocks. Conversely, another investor sets a relative return goal, aiming to outperform the S&P 500 index, thereby having their decisions influenced by the overall market trend and leaning towards stocks in highgrowth sectors.

Conclusion

Regardless of whether one chooses absolute or relative returns, investors should flexibly adjust strategies based on their investment objectives, risk tolerance, and market conditions. By thoroughly understanding the differences between the two, investors can more effectively employ trading signals to achieve their desired investment returns.

Trading Signals, Absolute Returns, Relative Returns, Investment Strategies, Market Analysis