How to Calculate Compound Average Rate of Return (CAGR) from Day Trading
The most common way to calculate investment returns is to use a time-weighted average. This method is perfect for traders who start with one pool of money and don’t add to it or take money out. This is also called the Compound Average Rate of Return (CAGR). If you are looking at only one month or one year, it’s a simple percentage.
To calculate performance on a percentage basis, you use this equation:
EOY represents the end of year asset value, and BOY represents the beginning of year value. The result is the percentage return for one year, and to calculate it, you use simple arithmetic.
Now if you want to look at your return over a period of several years, you need to look at the compound return rather than the simple return for each year.
The compound return shows you how your investment is growing. You are getting returns on top of returns, and that’s a good thing. But the math gets a little complicated because now you have to use the root function on your calculator. The equation for compound annual growth looks like this:
EOP represents the end of the total time period, BOP represents the beginning of the total time period, and N is the number of years that you’re looking at.
The basic percentage rate of return is great; it’s an accurate, intuitive measure of how much gain you’re generating from your trading activities. As long as you don’t take any money out of your trading account or put any money into it, you’re set.