Want To Trade At Your Best? Start By Measuring Your Performance
How much bang are
you getting for your account equity buck over a given time period? In this
report, I’ll teach you a simple calculation that will allow you to keep track
over your return on equity, from quarter to quarter or month to month.
Be aware that your
results will vary with market conditions as well as the consistency of your
performance. So when you identify swings in your performance, don’t take the
variance at face value. Examine the trades behind your results as well as the
performance of whatever market averages you consider your bogey.
Assuming you
add no outside funds into your account, and withdraw no funds during the period,
you calculate a straightforward percentage return on equity.
Profit
= Ending Equity — Starting Equity; Performance = Profit / Starting Equity
However, if you add
or withdraw funds during a given time period, the above equation will produce an
erroneous result. In such cases, percentage performance is calculated using the
following equations:
Profit
= Ending Equity — Starting Equity — Additions + Withdrawals
Adjusted Starting
Equity = Starting Equity + (Each Addition X number of days in period remaining
when that addition was made / total days in period) — (Each Withdrawal X
Number of days in period remaining when that withdrawal was made / total days in
period)
Performance
= Profit / Adjusted Starting Equity
The following
example uses quarterly time periods and assumes the following values:
Starting Equity on
Jan. 1, 2001 = $100,000
Additions: $30,000
on Jan. 23, $40,000 on Feb. 1
Withdrawals: $20,000
on March 1, $30,000 on March 7
Ending Equity =
$140,000
Profit = $140,000
— $100,000 — $70,000 + $50,000
Profit = $20,000
Adjusted Starting
Equity = $100,000 + ($30,000 X 67/90) + ($40,000 X 58/90) — ($20,000 X 30/90)
— ($30,000 X 24/90)
Adjusted starting
equity = $133,444
Performance =
$20,000 / $133,444
Performance = 15%
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