You’ve been trading
for a while and you now have a profit or perish the thought, a loss.
What is your return on equity? Determination of return on equity is
pretty simple unless you added extra money from a day job or
inheritance or you removed money to pay for the kid’s braces or that
trip to Tahiti with your significant other.
Let’s determine
simple return of equity (ROE%). Assuming no additional funds have been
added or withdrawn:
Profit = End Equity or money at the end of the period to be decided
minus Starting Equity or money you started the period.
ROE% =
{Profit/Starting Equity} X 100
Simple enough.
However this number is more useful if calculated over an annual
period. Determine how many days occurred between the beginning of the
period to and the end of the period. There are two ways I do this
task. Look at the calendar and count. A bit low tech and tedious, but
effective. For longer periods of time, I use the Excel Spreadsheet
function “Days360” which returns the number of days between dates.
Annual ROE% = {
ROE%/number of days} X 365
When you start
added or removing extra sums of money out of the trading account
calculating a simple ROE will give the wrong answer. This number must
be normalized for the period being considered. We do that by adjusting
the starting equity.
Equity
Correction (EC) = {# of days remaining in period when money is added
or subtracted}/total days in period.
For example: If we
add money on February 1 and we are calculating the EC for the calendar
year, the EC would be 365 – 31(January has 31 days)/365. If we wanted
the correction for the quarter, the EC would be {90-31}/90.
Adjusted
Starting Equity = Starting Equity + {Additional Money Added X EC} +
{Additional Money Withdrawn X EC}
