Dear All, 1- Let's say I sell 1000 USD equivalent of Euro which is 744 EUR. Then next day I buy back 744 EUR pay 990 USD. I gain $10 , but I didn't invest any capital ( except fees and interest) . what is my return? In most short selling web sites would say 10/1000 = 0.01 % . But this doesn't seem logical to me. 2- Even more, I can buy another currency with to 1000 USD I got from previous step, say 1080 CAD, then sell it again next day for 1010 , and make another $10 . Again no capital and $20 gain , return is ?? PS: I have an portfolio margin account at IB, meaning I can leverage and imagine I am fully long all my capital in stocks.
First, 10/1000 = 1%, not 0.01% More importantly, you borrowed and therefore OWE 744 EUR, initially worth $1000. So that is what your return is based on.
The capital you invest is the margin money needed to initiate the position in the first place, long or short. .
Most traders believe that the return on investment depends on the trading capital (example $5,000). Others say it depends on the margin money, not the trading capital. So, where is the truth? Hard to say...
Judge yourself on a monthly basis. Capital end of month-Capital begin of month= P&L (Assuming no additions or subtractions in capital) Then P&L/Capital begin of month=return on capital for that month. You can do it on a daily basis if you choose, the math is the same but use beginning of day and end of day. Don't look at notional trading or leverage for this calculation. 1245
OK. Now what if I told you that the initial $1,000 was only margin money (amount of money required by the broker to initiate the position), because in reality I had $10,000 in my trading account when I opened the position, would you still consider that the return on investment is 100%? Think carefully before answering...
If you have an account with $1M, and make $1000, but only use margin of 10,000, your return on that account is still 1000/1,000,000. You had AUM you were not using. For securities accounts, the calculation is simple and what I explained. For futures accounts, you can do the math that way or use notional value. Notional value does not consider margin, but a notional amount that you get to trade with ignoring the balance in the account. EG. I have an account with $1M USD. You are my CTA and I provide you with AUM of $100,000 USD notional to trade with. You will charge me base on $100,000 the 2% and 20% of profit from the P&L on your trading of that $100,000. The value of the account, margin etc is not relevant. Only profits earned. Does that help? Another example with equity accounts. $1M account with Reg-t. A $1M account with PM. Reg-t is 4X during the day and 2X overnight. PM is 6X both day trading and over night. That is not relevant to the returns. If I use no leverage or max leverage. At end of month is I have $10,000 in profits, that return on that account is 1%. 1245