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What's my true return?

  • #21
  • Dec 30, 2007 5:06pm Dec 30, 2007 5:06pm
Quoting In2Blues
The thing is, he's trying to calculate what his rate of return is on the money he actually used to trade with. How much he intended to use (in his mind, as you put it) doesn't mean anything because it's not in use. It's only the money actually used for trading that can be used to calculate a return. Remember, it's called a return on investment, not return on what you think you might invest.

Also, the $800 earned was not from just the first $1,000. If it was, then you'd be right at 80% return.

The first $500 he earned was from a $1,000 investment. That means he earned a 50% return on that investment:

500 / 1000 = 0.5 x 100 = 50

The balance is now $1,500.

Then, he adds another $1,000, bringing his balance to $2,500.

He makes another $300 on that balance, which is a 12% return on investment:

300 / 2500 = 0.12 x 100 = 12

Now, because there are two investments, the two returns are added together and divided by two:

50 + 12 = 62 / 2 = 31

So, his actual rate of return is 31%.

The formula at http://library.thinkquest.org/3096/42analy2.htm shows how to do it. In this case, the two periods are not years, but the principle is the same because there are two separate periods of returns to calculate.
Hello guys!

From my rather hazy point of view here in the middle of the night, this seems to be the right approach. I will go into it tomorrow and will be back then, but this makes perfect sense to me!

Good Night!
GMatt
  • #22
  • Dec 30, 2007 5:10pm Dec 30, 2007 5:10pm
Thanks for looking at it Gnat.

And you too M4X.
  • #23
  • Edited 9:14pm Dec 30, 2007 8:52pm | Edited 9:14pm
I don't think there's necessarily a right or wrong answer to the original question here: whenever we use averages to express a summary, or percentages to express a ratio, it's only ever the underlying data that tells the whole story.

IMHO, there's only one important trading statistic: profit factor, or $ won divided by $ lost. Return by itself is meaningless unless expressed in the context of drawdown (we can double return simply by doubling position sizes). But if I had to make a call, I would side with In2Blues statement about "his rate of return is on the money he actually used to trade with." But we can express return as a percentage of leveraged capital, unleveraged capital, amount actually in the trading account at the time of the trade(s), including or excluding amounts in other trading accounts, or otherwise held in reserve...... or anything else that we want..... again, percentages express an arbitrary ratio.

If return is simply the change in account balance divided by the start balance, then what about this:

Case A: start with $1,000; deposit a further $999,000; then make $300,000 from trading for the year. End result is $300k / $1k = 30,000%

Case B: start with $1,000,000; withdraw $999,000; then make $300 from trading. End result is $300 / $1m = 0.03%

But I think that one could possibly argue that actual trading performance is equal in both cases.

Hence I return to my original premise: averages and percentages are arbitrary measures. As Mark Twain once said, there are lies, damn lies, and statistics.

Anyway, Happy New Year to everybody!!

David
  • #24
  • Edited 9:15pm Dec 30, 2007 9:02pm | Edited 9:15pm
I'm thinking this is the only true formula for calculating returns

Quoting M4X
I have a 5k account that I trade my long term stratagy on (1 of 3 stratagies I trade). I started Dec.1st with 5k I have to date (Dec. 30th )made $800+ profits this month so I have a profit of $800.00 that I will request a withdrawl from my broker tomorrow. This month I have made about +16% on my account
I start that Account over every month at 5K
Since July I have made on my 5k account +58% or just under $3,000 in cash that i have pulled from my account.

Hope this explains how I calculate profit to me its not about pips its about percentage made when its all said and done.
As the song says "You Never count your money when it's sitting on the table..."
In trading, there is no bullshit. You either make money or you don't.
  • #25
  • Dec 31, 2007 10:39am Dec 31, 2007 10:39am
I don't have any experience calculating my true return, but I think is a weighted average.
hilmy83 want this because he will open soon a "hedge fund" for his family, and dilallist method won't help him to much when people will want to take their money back.

I have a small investment in a local mutual fund, and they use for these titles. Maybe you should look for these

starting (investor 1)
1000$ = 10 titles 1 title = 100$
grew 500$
1500$ = 10 titles 1 title = 150$
added 1000$ (investor 2)
1000/150 = 6.66 titles (number of the beast )
now you have 16.66 titles, each 150
16.66 x 150 = 2499 (I'll take 1$ for the math)
grew 300$
2800 = 16.66 titles
now
1 title = 168$

Investor 1 will have 68% return, while investor 2 will have 12% return.

I think this should help you.
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #26
  • Dec 31, 2007 11:05am Dec 31, 2007 11:05am
Quoting semar
I don't have any experience calculating my true return, but I think is a weighted average.
hilmy83 want this because he will open soon a "hedge fund" for his family, and dilallist method won't help him to much when people will want to take their money back.

I have a small investment in a local mutual fund, and they use for these titles. Maybe you should look for these

starting (investor 1)
1000$ = 10 titles 1 title = 100$
grew 500$
1500$ = 10 titles 1 title = 150$
added 1000$ (investor 2)
1000/150 = 6.66 titles (number of the beast )
now you have 16.66 titles, each 150
16.66 x 150 = 2499 (I'll take 1$ for the math)
grew 300$
2800 = 16.66 titles
now
1 title = 168$

Investor 1 will have 68% return, while investor 2 will have 12% return.

I think this should help you.
Semar
You lost me on the title stuff :-). I can implement what bifflet and 2inblues was showing us. But llambert mentioned something about time weighted effect of deposits on return. I'm not a math wiz or want to get too deep into that, but if it's simple enough, I would want to use that for return calculation.
  • #27
  • Dec 31, 2007 11:15am Dec 31, 2007 11:15am
Quoting hilmy83
Semar
You lost me on the title stuff :-). I can implement what bifflet and 2inblues was showing us. But llambert mentioned something about time weighted effect of deposits on return. I'm not a math wiz or want to get too deep into that, but if it's simple enough, I would want to use that for return calculation.
2inblues made the same math, but I only used titles. I thought it would be easier to calc your clients individual portofilio.

Using titles would be easier when you have multiple investors taking out or adding money.When investor2 is making a deposit, you'll simple sign for a title value (for investor 2, 1 title =150), and when he want's his money, you'll give at the current title value.
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #28
  • Dec 31, 2007 1:45pm Dec 31, 2007 1:45pm
Quoting hilmy83
Semar
You lost me on the title stuff :-). I can implement what bifflet and 2inblues was showing us. But llambert mentioned something about time weighted effect of deposits on return. I'm not a math wiz or want to get too deep into that, but if it's simple enough, I would want to use that for return calculation.
hilmy, that is something we have to do for retirement plans we work on, so we have to be exact. I personally would use the 2inblues approach on my own account. But once I get back to work, I will try and post the formula we use. I can't remember offhand, even though I am the one that programmed it.
  • #29
  • Jan 1, 2008 9:55am Jan 1, 2008 9:55am
Quoting In2Blues
The thing is, he's trying to calculate what his rate of return is on the money he actually used to trade with. How much he intended to use (in his mind, as you put it) doesn't mean anything because it's not in use. It's only the money actually used for trading that can be used to calculate a return. Remember, it's called a return on investment, not return on what you think you might invest.

Also, the $800 earned was not from just the first $1,000. If it was, then you'd be right at 80% return.

The first $500 he earned was from a $1,000 investment. That means he earned a 50% return on that investment:

500 / 1000 = 0.5 x 100 = 50

The balance is now $1,500.

Then, he adds another $1,000, bringing his balance to $2,500.

He makes another $300 on that balance, which is a 12% return on investment:

300 / 2500 = 0.12 x 100 = 12

Now, because there are two investments, the two returns are added together and divided by two:

50 + 12 = 62 / 2 = 31

So, his actual rate of return is 31%.

The formula at http://library.thinkquest.org/3096/42analy2.htm shows how to do it. In this case, the two periods are not years, but the principle is the same because there are two separate periods of returns to calculate.
The period was only 1 year though not 2. So 50% + 12% = 62% is the correct return for the year.

Also for fund performance just calculate the return for a client who has made no changes during the month. Starts Month1 with 1,000.00 and makes no additions/withdrawals and ends Month1 with 1,050.00. This is a 5% return for the fund that month. All clients who made no changes would have the same return. Any clients who made changes would have different returns but that is only material to that specific client. The published monthly return for the fund is the 5%.

Then your string those monthly returns together on a spreadsheet and compound 1,000 for those months to get your total return for the period in question.

See the performance page for this fund especially the VAMI chart. http://www.fx-quant.com/
  • #30
  • Edited 10:33am Jan 1, 2008 10:08am | Edited 10:33am
Quoting JustLookin
The period was only 1 year though not 2. So 50% + 12% = 62% is the correct return for the year.
I think the 2 was the average of both (50% on the 1st and 12% on the second = 62/2), not 2 years.
  • #31
  • Jan 1, 2008 10:43am Jan 1, 2008 10:43am
Quoting llambert3
I think the 2 was the average of both (50% on the 1st and 12% on the second = 62/2), not 2 years.
OK, by why would you want to know the average return of 2 6-month periods? 62% is his return for the year.
  • #32
  • Jan 1, 2008 11:01am Jan 1, 2008 11:01am
well I just signed on to my work computer to look at the formula for the PRR

Here it is:

PRR = gain/(begbal + weighted transactions)

weighted transaction = (deposit amt * (days of deposit))/total days **assuming no withdrawals in this case

So, in the example:
Assuming you made $300 and $500 for a total of $800 gain. Your beginning balance was $1000. You deposit $1000 on 6/30/2007. The end of the period is 12/31/2007. So the weighted transaction for the deposit = (1000 * (184)/364)) = 505.49

**Note, excel said 364 was difference between 1/1/2007 and 12/31/2007 and 184 for 6/30/2007 to 12/31/2007 so that is what I used

PRR = 800/(1000 + 505.49) = 53% on an annualized basis.

I am still not sure this is accurate for what we do. I will ask the account rep the question tomorrow. He double checked my code with his own excel formula.
  • #33
  • Jan 1, 2008 11:02am Jan 1, 2008 11:02am
Quoting JustLookin
OK, by why would you want to know the average return of 2 6-month periods? 62% is his return for the year.
It was 2 different transaction calculations.
  • #34
  • Jan 1, 2008 11:13am Jan 1, 2008 11:13am
Quoting JustLookin
The period was only 1 year though not 2. So 50% + 12% = 62% is the correct return for the year.
You're correct. I got caught up in the calculation and forgot that both of those were for the same year. Had it been for two years, then it would be an average return of 31% per year.
  • #35
  • Jan 1, 2008 11:18am Jan 1, 2008 11:18am
Quoting JustLookin
OK, by why would you want to know the average return of 2 6-month periods? 62% is his return for the year.
ahhh, after in2blue responded I REALLY read what you are saying. Your 6month period thing confused me... Why divide by 2? Gotcha
  • #36
  • Jan 2, 2008 8:18am Jan 2, 2008 8:18am
im not sure if this is correctly done. but it might help.

password : fx123
Attached File(s)
File Type: xls Rate Return Table.xls   24 KB | 402 downloads
  • #37
  • Jan 3, 2008 3:19am Jan 3, 2008 3:19am
Before the explanation here’s a quick question that you can answer on your own and will likely turn the light-bulb on for you… If a trader has traded for 10 years, and his average yearly return is 15%, has he only made 15% over those ten years?

Our portfolio which has a starting balance of $1000 earns a 50% rate of return in the first period (500/1000). This brings our portfolio balance to $1500. Our trader is happy with his model’s returns and deposits another $1000 into his portfolio, bringing the balance to $2500. Between that deposit and this reading (which could be one month, one year etc) our portfolio sees another 12% in interest (300/2500). Things are good because we’ve made 62% so far on our efforts…

Why is it 62 and not 31? Because we’re looking for the actual interest received for all periods and not the average return for each period. Think of it this way. What were the total deposits for the two periods? $2000, right? Right. What would the average deposit be for each period… $1000. Yes? Yes… But we know that $1000 is not the total amount of money deposited in the account. The same holds true for the returns.

The average return for each period was 31%: One period was 50%, one was 12%; summed and then divided by the number of periods gets us or average of 31%. But that’s not our total return for the two periods.

Total Deposits: $2000
Average Period Deposits: $2000 divided by number of periods; $1000

Total Returns: 62%
Average Period Returns: 62 divided by the number of periods; 31%

In the original post, Hilmy correctly states that he knows the returns are not 40%. Taking the total returns of 800 and dividing that by total deposits of $2000 dilutes the returns because of the timing of the deposits. Part of the returns (a large part) is associated ONLY with the original $1000 balance. The second return is associated with the original deposit of $1000, the original return of $500 and the second deposit of $1000.
Trade Small. Be Patient. Learn to Survive.
  • #38
  • Jan 3, 2008 8:34am Jan 3, 2008 8:34am
Quoting FXAnalytics
Before the explanation here’s a quick question that you can answer on your own and will likely turn the light-bulb on for you… If a trader has traded for 10 years, and his average yearly return is 15%, has he only made 15% over those ten years?

Our portfolio which has a starting balance of $1000 earns a 50% rate of return in the first period (500/1000). This brings our portfolio balance to $1500. Our trader is happy with his model’s returns and deposits another $1000 into his portfolio, bringing the balance to $2500. Between that deposit and this reading (which could be one month, one year etc) our portfolio sees another 12% in interest (300/2500). Things are good because we’ve made 62% so far on our efforts…

Why is it 62 and not 31? Because we’re looking for the actual interest received for all periods and not the average return for each period. Think of it this way. What were the total deposits for the two periods? $2000, right? Right. What would the average deposit be for each period… $1000. Yes? Yes… But we know that $1000 is not the total amount of money deposited in the account. The same holds true for the returns.

The average return for each period was 31%: One period was 50%, one was 12%; summed and then divided by the number of periods gets us or average of 31%. But that’s not our total return for the two periods.

Total Deposits: $2000
Average Period Deposits: $2000 divided by number of periods; $1000

Total Returns: 62%
Average Period Returns: 62 divided by the number of periods; 31%

In the original post, Hilmy correctly states that he knows the returns are not 40%. Taking the total returns of 800 and dividing that by total deposits of $2000 dilutes the returns because of the timing of the deposits. Part of the returns (a large part) is associated ONLY with the original $1000 balance. The second return is associated with the original deposit of $1000, the original return of $500 and the second deposit of $1000.
So my TOTAL return is 62%. I can comprehend that. But is there any merit of using AVERAGE return of 31%?? Basically why average the return?

I guess my question is, if I am trading for others, which is the best or more accurate representation of how I did? assuming that there will be new clients depositing and withdrawing money.
  • #39
  • Jan 3, 2008 8:46am Jan 3, 2008 8:46am
I'm getting ahead of myself. So I average if this was on 2 different years, but if it's all in the same year, my return would be 62%
  • #40
  • Jan 3, 2008 9:25am Jan 3, 2008 9:25am
If you average a return or not depends on what you want to tell some one... Most investors will want to know what your average yearly return is, what your Sharpe ratio is and how long your track-record is (how many years you've been trading this model).

You can report average monthly returns if you want but they are less meaningful.

What you don't want to do is say, I returned 31% for this period (be it a week, month or year) when it was really 12%... Quoating the average and not the actual would get you into trouble.

When you build a track record it will often include a table with all twelve months accross several years. You wil show each actual return for each month, and then the total returns for each year. From those numbers you will begin to extract additional data; average annual return, Sharpe Ratio's, Peak to Valley Draw Down etc.

This is another good reason to spend some time out at Barclays and Autumngold and see how the proffesional traders calculate and dislplay their returns...
Trade Small. Be Patient. Learn to Survive.
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