Guys, need your help with something.
If I have a ROI of 10% per month, 6-7 months of the year. Does this mean I am making on average 100% for the year. My work colleague and I were debating this at work. I was saying to him that this can not be the case. As there will be some months when one only makes 7%, 5%. Or times when someone is down -10% for the month. How do I calculate my ROI for the year?
It is a bit of a theoretical question, because unless you start with a bank that will never change (no withdrawals, no additional deposits), you will inevitably deal with a new starting bank every month. That having been said, the yearly ROI is the result of multiplying all the monthly ROIs together, 12 times over. They don’t add up, but some guidelines below. Easily done in an Excel spreadsheet.
Monthly ROI Yearly ROI
2% 27%
3% 43%
4% 60%
5% 80%
6% 101%
When we are newbies (like me) we tend to create plans that target 10% a month (314% per year), but soon realize that it is not as easy as course sellers say to make 10% per month. Thinking logically, and knowing some realities for many traders, anyone should be satisfied with the 2% per month, because that would consistently beat any other investment I have known over the past 30 years with the exception of running your own business. Imagine you are a professional Forex trader who earned £1M with the banks three years ago, and decided to bail out and run your own fund. Being frugal, and after paying taxes, you decide to put 75% of your after tax funds into your own bank for trading. That is about £450K. So a 24% target would generate an income of £108K per year. If you are a paid trader, you get 80% of a £1M fund, so you gross £86,400 per year. Either way, you are probably earning a lot more than whatever your current day job is. That is why my first goal is to learn NOT to lose money. After that, I can dream about having an edge that would generate a consistent 2% return on bank per month, then onwards and upwards.
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Hello Mondeoman,
Thanks for your comprehensive reply.
I was a little trigger happy and realized after posting that other traders have asked this question before here and on Reddit. I saw some interesting replies. From my understanding the answer to the question will depend on various factors:
- How experienced is the trader - do they know what they are doing?
- How big is the trader’s account?
- And the traders risk appetite once proper risk management is established of course.
Once a trader learns how to trade, which again takes time, practice and study, the plan that a trader with a $1,000 account will have will be very different to that of a trader with a $1,000,000 account.
This also applies to the yearly ROI these two traders in different situations will aim for.
The trader with a million dollars will be happy with a 2% ROI per month. Because this is still giving them a substantial sum of money. With such a big account, this trader does not need to risk aiming for 10% ROI per month.
The trader with a thousand dollar account may not be as happy with only a 2% ROI per month. As the return on investment will be a lot less. In this scenario, this trader can take more risk and aim for a 10% return per month. Now will they always get it. Of course not. They may only manage 5% some months or less.
Again, there are different ways of investing. Different trading styles. I leaned towards the replies of traders that seem to have the same kind of mentality I have, except they are more advanced than me.
Wish you all the best on your journey, Mondeoman.
I just simply divide the profit by the investment that I made. Then add them up.
Percentage of investment and profit!
Oh, I used some complicated formulas at first too, etc.
And then it became easier to treat it and just calculate the monthly income, “net” income…
I don’t know why I read this over again, but somebody recently posted on another thread about confirmation bias. This held me back for years until I understood what it meant. Not only in my Forex trading but in my IT consulting too, it has done me well to consider that just because others have the same opinion as me about a subject, it doesn’t mean we are right. I am now far more agnostic when I internally digest strategies and plans of others, and I have to say that my approach is now far more accepting of others’ ideas than sticking to my own. It took me a long time to come to that conclusion.
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I don’t know much about calculations. I simply divide the profit by the investment I make.
This is quite an insight and I have, honestly, never thought about it. Looking back, I accept that I am guilty of “confirmation bias” too. I feel the reason for such a bias could be that we find it easier to operate in life with the assumption that we are right. So, we jump in to embrace opinions that align with ours while negating everything else as noise. But thanks to your post, I’ll try keeping an open mind now.