Here’s another Myfxbook related post which was inspired by a chat I had on Twitter. It all started when I objected to advertising the ‘Gain’ of a trading system with no mentioning of the ‘Absolute gain’ – especially when in this particular case the difference was almost 5 times in favor of the ‘Gain’.
For those of you who don’t know, here is how Myfxbook calculates performance. Given the fact that Time Weighted Return (TWR) measurement is required by the Global Investment Performance Standards published by the CFA Institute, it would seem that there’s no point in further discussing this, right? Wrong.
The fact is that there are many systems with a ‘Gain’ of hundreds of percentage points but with a double-digit ‘Absolute gain’. Does this just happen in the normal course of trading your account or is there more to it? As a rule of thumb, the bigger the discrepancy between the two, the warier I am that the trader might not be acting in good faith.
Anybody can fool around with the account above ( he’s the one with the most subscribers in Autotrader) and see for himself how inaccurate the ‘Gain’ can be. For example, set the custom analysis dates: 12/06/2012 19:25 and 01/02/2013 02:06. You’ll notice that both ‘Gain’ and ‘Abs Gain’ are the same, 83.8%. Now set the end date for next day, 01/03/2013 01:53 and you’ll see the ‘Gain’ is now 134.16% and ‘Abs Gain’ 54.63%. All this because of one deposit and one profitable trade closed. Keep at it for some time and you end up with the kind of discrepancy that we see in the picture.
Let me finish this with a quote from Monroe Trout, which should also answer the question in the title:
There are plenty of traders I know who show track records with an amazing cumulative winning percentage. I’ve seen situations where they might be up 1,000 percent over
a five-year period, but if you examine their track record in terms of net dollars made or lost, you discover they are actually down.
Because they made the large percentage returns with small capital and then lost money when they were managing large sums?
Exactly. I’m not in the business of picking CTAs. But if I were, one of the first screens I would use would be a person’s total dollar profit—how many dollars did the CTA pull out of the market. If that number were negative, I would eliminate the CTA from consideration, regardless of the percentage return. – Monroe Trout, New Market Wizards by Jack Schwager.