- What is ROI?
- How to calculate ROI?
- Why does ROI matter in trading?
- What has your ROI been in trading?
What is ROI?
ROI stands for Return on Investment. It refers to the return generated, i.e. profit made on the capital used.
ROI is also known as ROC at times, which stands for Return on Capital.
To earn a return, one would need to have some capital and deploy that capital. So it naturally becomes important to know the return with respect to that capital deployed.
So terms like ROI and ROC are mostly used in finance and business but, isn’t trading just like any other business? So, it is something that even traders use.
I’ll tell you why ROI is important in trading but before that, I’ll show you how to calculate ROI all by yourself.
How to calculate ROI?
You have a capital of $100,000 and you take trades whenever you get the opportunity to capitalize on the price movements.
Let’s consider that you took 100 trades between January and December and by the end of the year you managed to bring your account to now a total of $150,000.
Now to calculate the ROI or ROC, whatever you like to call it, you need to use this formula,
ROI = (Profit / Capital) x 100
Your capital at the beginning of the year was $100,000 and by the end of the year, it is $150,000. So the return generated or the profit earned will be $150,000 - $100,000, which equals $50,000, right?
Now just put this in the formula and you’ll easily calculate the ROI.
ROI = ($50,000 / $100,000) x 100
=0.5 x 100
In this case, the ROI was 50% which is a pretty decent return, to be honest.
I have taken a really very easy and convenient example here for the sake of a quick explanation. Try the calculations out on your own with some other examples too.
Why does ROI matter in trading?
Why do traders trade? There might be many reasons and one of the most important reasons is to generate profits.
I mean who would want to trade to make a loss or even end up break even after putting in so much time and effort.
Now, we know that ROI will tell you how much profit you’ve made using the capital and this somehow will let you know about your performance.
So if I trade with $100,000 and make $50,000, I know my ROI is 50% and for me, it would be decent enough.
I know, it’s very subjective, that’s why it is important to have realistic expectations.
What has your ROI been in trading?
Now that you know about ROI and how to calculate it, do let me know what has your ROI been so far in trading and whether you are satisfied with it or not.
Don’t forget to share this blog post with others and let them also understand this concept.
Feel free to ask any questions you may have in the comments section and I’ll answer them at the earliest.