Calculating Your Per Trade ROI

The other day I came across an "educator" specializing in e-mini strategies and they told me (as is also stated in their marketing claims) that their students get a 10% return on their money trading the e-mini S&P's for every one point in profit. My first thought was, "you do? Wow, that must be some system." My second thought was, "you are retarded".

In reality I just sat there and smiled whilst they carried on about how fantastic their returns are but it got me thinking.

His math works like this: His broker gives him $500 day trading margins.  Every point on the ES is worth $50. Therefore, $50/$500 is 10%.  It looks even better for those of us trading the Russell (TF) since one point is $100 or 20% with $500 day trading margins.

I suppose there is some logic to this calculation but I still think it is flawed.

First, not all brokers will give you $500 day trading margins therefore, this 10% ROI trading the ES is not universally applied.  For example, TradeStation gives me $1375 day trading margins so my ROI is only 4% trading the ES - no wonder it feels like I'm hardly making any money!!

Second, to take advantage of the $500 margins you actually have to open an account with lets say, $2,000 (TS requires $5K, making my life even harder).  Therefore, you really have $2000 at work when trading that one contract. As an aside, I realize that you can still trade if your account drops below $2K after you open the account and I also realize you can theoretically hold four contracts with your comfortable $2K account balance but if you do that, I wholeheartedly stand by my second claim regarding retardation.  

Third, and following up from my second point, in reality, when smart traders are trading, they are not controlling as many contracts as their account will allow. To do this is suicidal. But unless you are doing this, then once again, these per trade ROI figures are bogus. 

Normally, when one calculates their ROI they do it on a per trade basis and then based on the overall account. Unfortunately however, I don't think there really is an easy answer for a per trade ROI when trading futures. Though it works differently with stocks, options and EFTs.

For example, today I closed out of an options trade I put on a few weeks ago. It looked like this:

Bought 1 Dec. 95 call (DIA: DAVLQ.X) for $3.57 per contract.  The actual debit from my account was $357 (plus commissions). Today I sold said contract for $6.25 and the actual credit to my account was $268 (again, less commissions).  Therefore my (gross) per trade ROI was 75%. If I add that $268 gain to my overall account balance, the ROI is much less, it's actually rather nominal.

At a minimum, futures traders should calculate their ROI based on the overall account balance but once again, I think it is very difficult to do it on a per trade basis and I don't think the method that spits out a 10% return as described above is the right way to do it. Furthermore, doing it this way to market your education business is flat out wrong, in my humble opinion. 

If I feel compelled to calculate my per trade ROI, which I currently don't, this is probably how I would go about it:

Per my rules, if I decide that I will control one contract for every $5K (choose your own number) of account equity, and I happen to have on 3 contracts during a particular trade, I actually used $15K of account equity to control that trade and therefore, my profit (or loss) on the trade would be divided by $15K to calculate the per trade ROI.  I know that doesn't sell very well in the education business, which is filled with hype and an abundance of bullshit but in my opinion, this is an appropriate way to think about it. 

If there are any other opinions on the matter, I would be interested to hear them.  In the meantime, congratulations to the DOW for crossing 10,000!!

Comments

[E-Mini Player]

I agree with your method. Regarding the educator...can you blame him? 10% ROI PER TRADE sounds pretty f'in fantastic doesn't it? His focus is marketing, not common sense or accuracy, and he's probably well aware that there's a sucker born every minute.

[Sam]

I agree with you, but in all honesty I do not calculate my roi at all. I know how much money I make or lose. Bottom line for me is did I make enough money to pay the bills and have some extra to put away.
congrats on the new family member

[Stan]

Thanks Sam - I don't calculate my ROI either but the whole conversation made me really think about it. That whole 10% nonsense just makes me laugh!