Swing Trading for Dummies Summary (C13): Evaluating Your Performance

Buy Swing Trading for Dummies here: https://amzn.to/3WUSVnK

The only way to know how good a swing trader you are is by calculating your portfolio’s returns.

Unfortunately, this task is not so straightforward since calculations can be complicated by taxes, commissions, deposits, withdrawals, and other factors.

If your broker calculates time-weighted performance figures, your job is done.

If not, read on.

Sam’s Note: Interactive Brokers calculates time-weighted performance figures. Login to your account and navigate to the ‘Holdings tab,’ within the ‘PortfolioAnalyst’ section.

When appreciation or depreciation to your trading account is solely from trading (e.g., no deposits or withdrawals) then calculating your performance is relatively easy.

Total return = (Ending Market Value - Beginning Market Value) / Beginning Market Value.

Annualized returns are the common practice in the world of finance. They are returns converted to an annual basis. Think of them as an average return.

This only works for time periods spanning at least 12 months!

Here are the steps:

Step 1. Calculate the return over the specified time period.

Step 2. Add 1 to the return (from step 1). Returns are expressed as a percentage so you have to convert it to decimal form before adding the 1. For example, a return of 76.23% = 0.7623. Then you add 1 to get 1.7623.

Step 3. Calculate the time-period conversion fraction you should use to get your annual return.

Time-period conversion fraction = Time period you want to convert return into / Time period return is currently expressed in.

Notes:

• The numerator and the denominator must use the same unit of measurement
• The denominator is equal to the time period from step 1

Step 4. Use a scientific calculator to raise the figure calculated in Step 2 to the fraction calculated in Step 3.

Step 5. Subtract 1 from the figures in step 4 and convert the result into a percentage by moving the decimal two points to the right. This final figure is your annualized return.

When you make deposits and/or withdrawals from your trading account, you need to do some extra calculations using the time-weighted return model.

Note: There is also the money-weighted return model but the time-weighted return model is more widely used.

To calculate your time-weighted return is a three step process.

Step 1: Break Down the Time Periods

The number of deposits and withdrawals you make determines how many time periods you need to calculate returns for.

If you make two transactions (in this context a transaction is a deposit or withdrawal) then you will have three time periods.

The first time period is from the start of the time you want to calculate until the first transaction (deposit or withdrawal).

The second time period is from the first transaction until the second one.

The last time-period is from the second transaction until the end of the total time period you want to calculate.

Step 2: Calculate Each Period’s Return

Use the formula shown under “The Easiest Calculation” heading earlier in this post.

Step 3: Chain-link the Returns

Chain-linking the returns is when you combine each return using multiplication.

It doesn’t matter if one period is much shorter or longer than the other. As long as they are adjoining without overlap, you can link them.

Total return = (1 + R1) x (1 + R2) x … (1 + RN) -1

R1 = Return in subperiod 1

R2 = Return in subperiod 2

RN = Return in Subperiod N

Make sure you convert percentages into decimals before doing the calculations. You can convert the final answer back into a percentage at the end.

Once you have your return figure, you need to compare it to a major benchmark so you can see how you’re doing in comparison to the market.

You can find the returns for all major benchmarks here: https://indexcalculator.ftserussell.com

Note: Using an absolute return for your benchmark means you won’t need to calculate a risk adjusted return.

Once you know your return in comparison to some benchmark you can work on adjusting your trading plan.

Review your trading journal monthly to see if there are any changes you can make. Don’t force changes. Look for recurring failures and successes and adjust your plan so you do more things that win and fewer that fail.

Read the next chapter here.

Buy Swing Trading for Dummies here: https://amzn.to/3WUSVnK