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Minyan Mailbag: Managing P&L for Day Traders


It's tax season. Here's what you need to know.


Dear Prof. Sadana,

Lately, I've found myself becoming more of a trader than an investor. While my trading account is still small, I did exceedingly well last year on a percentage basis, with much of that thanks to what I've learned on the 'Ville.

My problem arose this past weekend as I was preparing my 2008 tax return. I quickly realized that the simple accounting I had done in the past for my longer term account was woefully inadequate for trading. I was shocked to see what my actual gains had been.

There doesn't seem to be a great deal of info on P&L management for new and/or non-professional traders, and I was wondering if you or the other professors had any input or suggestions.

Many thanks,
Minyan J

Dear Minyan J,

Congratulations on a great performance in 2008! Stories like yours provide moments of personal triumph for everyone here at the 'Ville. It makes it all worthwhile.

Regarding the P&L, here are some personal thoughts: I keep track of my account value in a spreadsheet every day. It helps me track account performance versus the S&P 500, and the severity and extent of the draw-downs. It also helps me manage the taxes.

On an unrelated personal note, I think the biggest value I've found in it is managing the draw-downs, which are an abhorred yet an essential part of a trader and an active investor's life. Just a cursory glance at the draw-downs can tell me if I strayed from my rules, or the market turned unexpectedly virulent (or a cruel mix of both!) and I can take steps accordingly.
If keeping a food diary can help people deal with weight issues, a trading log can definitely be instrumental in assessing and improving one's trading style.

It doesn't have to be fancy, just starting account values and daily or weekly assessment will do. After all, it takes away the possibility of transference of blame onto the market, or "them." And certainly it's impossible to argue with the numbers! Depending on how much time you want to give this pursuit, you can also keep track of every trade (I did that for many years, but not anymore).

Having said that, I don't think there are any roundabout ways of calculating profits and losses. Surely, one can "book profits" or "carry-forward losses" depending on their trading style, but between you and me, I'd gladly pay taxes on profits than carry-forward losses any day!

If you do, however, decide to venture into the "trader-status" arena, Trader Status is an excellent site that provides a good starting point for qualifications and rules.

Hope this helps spur some thoughts.

Smita Sadana

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