Which % return is true?

Discussion in 'Trading' started by Quah, May 16, 2004.

  1. Quah


    Given :

    1. Trading Emini S&P futures - ES - which are valued at $50/point.

    2. My broker allows me to daytrade 1 contract of ES with $500 margin.

    3. I buy ES @ 1000 and sell it @ 1001 for a 1 point gain.

    What is my % profit?

    10% (using the $500 margin calculation).

    1.25% (using the $4000 CME margin requirement)


    0.1% (using the actual value of the underlying)

    Or are they all correct?

    (I know commish changes the actual net %, but lets leave that out for purposes of this question)
  2. Sanjuro


    I would think your percent gain is based on the
    amount of money you have in your account.

    If you have a $500 account and make 1 ES point on 1 contract
    then you have made $50 which is a 10% gain.

    If you have a $5000 account and make 1 ES point on 1 contract
    then you have made $50 which is a 1% gain.
  3. Isn't return based on the amount at risk?
  4. Quah


    Ah, I guess I'm mixing terms here - "return" and "profit"...

    I guess I thinking more along the lines of that single trade - what % profit was made on that single trade.
  5. The % gain/loss per trade is based upon the equity that was committed to the trade, which in your example appears to be $500. Accordingly, the gain is 10% for the example trade.
  6. The only real measurement that matters is risk vs reward, i.e. X units of risk are required to obtain Y units of profit. The only way to truly determine risk vs reward is with a statistically significant sample of past trades showing your average loss vs your average win over a representative period.

    The actual percentage return is irrelevant because the amount of leverage you employ is a personal decision and has theoretically infinite variance. Hypothetically you could borrow a million dollars and use the same one point strategy to make a 20,000 percent return on your original capital with hundreds of contracts, or you could trade one contract with a million dollars in cash and have a risk factor of roughly .00005% etc.

    Point being, looking at a percentage return in a vacuum tells you next to nothing and isn't any real help in determining how profitable the strategy actually is.
  7. Thanks.

  8. This is a completely ambiguous statement.

    Percentage returns have nothing to do with total money under management.

    Absolute dollar returns may be determined by money under management, but even then they are more likely to be determined by the aggressiveness of the strategy and the amount of leverage employed, which can vary among traders by a factor of 100:1.

    So I don't see how this statement is true.
  9. There are several measures of return: return on assets (ROA), return on equity (ROE), return on investment (ROI), and return on sales(ROS). So, take your pick.

    The Internal Rate of Return is the rate of profit from assets. In this case maybe this is what Quah is actually trying to calculate.
  10. It isn't true, I was confused as to the intent of the question asked. In absolute returns, and in accounting standards, returns as you will see them posted on most financial statements are based on Net Asset Value, or money under management.

    Now to return to the question at hand, it seems clear that the return % on that particular trade is based on the money utilized to create the opportunity.

    I disagree with the point "determined by the aggressiveness of the strategy", it is implied that as risk rises, returns do as well.
    Whether you use more or less leverage is simply a factor multiplication or division of your total return. No one cares what kind of returns you made by taking leverage into consideration. What matters is, how much money did you return on the money that was under management at time t.
    #10     May 16, 2004