In this chapter, we discuss differerent ways to calcualte profitability of the trading strategy and what are the trade offs.
Challenges come from the effects of deposits and redemptions: a live trading strategy does not have a fixed capital over its life time like a backtest.
For open strategies, there can deposits and redemptions any time. This will affect the equity, cash and thus performance per dollar. To make matters more complex, on vault based strategies the underlying positions can be reduced by a redemption event.
To understand if a strategy is performing well we can look
Profit of trades
Profit of trades, considering position sizing
Profit of assets under management
Profit per share
Profit for individual investors
Profitability as realised positions profit#
This is the default measurement for profitability.
For most of use cases, we want to measure the trading performance of the strategy, not the return on capital. The realised positions profit is simply % profitability of closed positions during the time period.
The realised position profit can be
Absolute performance % of the trades
Relative % to the size of the total portfolio equity, as position sizing is used as the risk control method.
Currently vault based strategies can do in-kind redemption which directly affects the underlying open trading positions. Currently this is not yet accounted on these positions.
Compounding realised positions profit#
All trading strategies assume that they are compounding: you will reinvest the profits to new trading positions. Over the time, profits will compound.
The compounding realised positions profit tells the trading strategy profitability assuming there are not depositons and redemptions during the trading period, and all strategy profits will be reinvested to trading.
This gives us a good metric to benchmark the performance of differents strategies independent of funding flow.
Trading Stratey calculates compounding realised profitability with position sizing considered. The formula for Trading Strategy default profitability calculation over time is:
strategy_profitability = (1 + position_1_realised_profit_percent * position_1_relative_size) * (1 + position_2_realised_profit_percent * position_2_relative_size) * (1 + position_3_realised_profit_percent * position_3_relative_size) ... - 1
Funding flow shows US dollar valued deposits and redemptions over time. It’s main use case is to calculate funding flow corrected returns.
Funding flow corrected returns#
The funding flow corrected returns is the daily/monthly returns minus any deposits and redemptions.
Any large funding flow event will skew this calculation. Although funding flow corrected returns may be used as a profitability metric, it is still subject to skew by funding events.
Profit for individual investors#
For any individual investors, we can calculate how much profit this investor has done for his/her position over time.
Currently this information is not available through the trade execution user interface.
tradeexecutor.visual.equity_curve for different profit calculation
and equity curve formulas and examples.