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The Many Ways of Calculating Returns

Numerous trading services and newsletters inflate percentage returns by utilizing loose math or fraudulent logic which makes level comparisons difficult. I must mention a truly egregious technique employed by one popular newsletter writer to goose returns. This person sells half of a position if it doubles and then considers the remaining half of the position to have a one cent cost basis. This results in enormous (inflated) percentage gain calculations even when the remaining half position is sold at a lower price than the first half. It is ridiculous behavior and a red flag that there may be other issues. Run, don’t walk when you spot this sort of activity.

Fair comparisons can be difficult even when there is no ill intent. Percentage gains and losses on trades should be calculated as the gain or loss divided by the buying power reduction which can be complicated by the use of margin. Margin calculations vary depending on the broker, the type of account and the type of financial product. Changing market conditions can lead to varying margin requirements as volatility changes. Making comparisons is difficult when there are so many variables. That is why the Rational Speculator (RS) only calculates raw returns (i.e. dollar gain or loss per trade). However, there is an exception for calculating percentage returns. The RS calculates percentage returns in addition to dollar gains or losses for Speculations as many Speculations are penny stocks. Calculating dollar gains or losses trading 1,000 shares of a penny stock understates the real impact of the gain or loss as it is common to trade many multiples of 1,000 shares.

RS Trades typically feature options (10 lots), futures (1 contract), or options on futures (1 contract). The RS Speculation standard is 1,000 shares. Transaction sizes may differ in my trading accounts, but I make every trade recorded on the RS. Every trade initiated on the RS is followed until it is closed for a gain or loss. There is no cherry picking. Commissions and fees are excluded because they are variable. Closed Trades and Speculations are recorded by month on the Results page.

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