I have argument with a friend how to calculate performance on the account. I used to calculate it based on the final balance at the end of the current period (in this case at the end of every month). However, he is trying to convince me that I should take NAV instead.
Although, he is right at some point, I am a little bit reluctant to take this approach because NAV changes every minute on daily basis and since I am long term trader that doesn’t matter to me too much. To do some adjustment I returned back to my calculations and some of the months are showing really awesome returns with 40% while some of the months show negative value based on NAV. But again, it depends on the positions which I have been holding at this time which makes this value very misleading.
I only look at account capital, ignoring unrealised gains. The unrealised gains are the eggs that haven’t hatched yet.
But I must admit I never bother to do a % calculation (occasionally in my head if I get into a dispute on a traders’ forum). As soon as you start to calculate and log these things, they become a target, and once this number is a target, you can be tempted to skew strategy to make the target or improve on it. Like win rate or r:r. That’s a slippery slope.
We agree with your friend on this issue. The advantage of NAV is that it takes into account floating P/L resulting in a truer measure of your month-to-month performance.
It’s still possible to see your NAV at the end of each month.
I won’t argue with you on this. However, I am not convinced that NAV ie. equity shows right picture especially for long term periods as a month. Let me give you two examples:
On Jan 31 23:59 your equity is showing 95 USD but due to some move in the market on Feb 01 00:05 it shows 105 USD, This technically means that it grew up 10 % for less than 1 hour.
If I open position on Jan 31 23:00 and it goes against me this will be counted against my overall monthly performance. Now if it goes positive on Feb 01 at 01:00 and I take the profit this will count in my Feb performance which to me is not right.
yes… you have literally answered your own question
DEFINE THE FREQUENCY OF THE PERFORMANCE MEASUREMENT that you wish to take.
it would appear to me that you and your friend have different views on when the measurement should be taken, this is why you disagree as to how to measure the performance
STANDARDIZE YOUR DEFINITION OF PERFORMANCE
AND
STANDARDIZE THE FREQUENCY OF MEASUREMENT
What I feel is do not calculate. When you are trading forex you ate not buying any assets like in the stock market. If you really want to calculate profit, calculate when all positions are closed. Unrealized profit or loss is that much important as it can go opposite.
“Although, he is right at some point” holds the answer to your problem. There are no perfect answers to most of the questions in real life. So, stick to what you feel more comfortable with and calculate an NAV based returns also for a longer period, let’s say Six months, so that the volatility is reduced.
but, we ARE NOT Calculating profit
When we do these calculations THEY ARE PROJECTIONS and should be treated as such
hence concurring with this statement
so. the projections will include a risk component in the calcuation and an assessment of risk.
based on that, there will be a projection of profit
and it will be understood that IF things go according to plan the profit will be realized
Now. you might still say
"Ok, martin, but that’s why i said this"…
and i understand
but, I STILL HOLD FIRM that Projections are important, without them you are lost in the water and have no direction.