Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.
To calculate 30-day ROI, the benefit (or profit) of an investment over 30 days is divided by the cost of the previous 30-day investment.
The return on investment (ROI)Â formula is as follows:
The profit factor is defined as the gross profit divided by the gross loss (including commissions) for the entire trading period. This performance metric relates the amount of profit per unit of risk, with values greater than one indicating a profitable system.
For example, there is a trading strategy, creating an average of 100 trades is made, 50 trades win $2, total profit is $100. On the contrary, the remaining 50 trades lose $1, total loss is $50.
Finally, we divide $100 / $50 = 2.00. So Profit Factor = 2. This number means that your strategy generates $2 profit for every $1 lost.
Profit Factor less than 1 shows that the system is not good, not generating profit for you. Profit Factor = 1 only gives you the break-even number. Therefore, it is necessary to own a system with Profit Factor greater than 1.
Drawdown is a term used to describe the greatest decline in capital when investing.
It is an important tool in evaluating and controlling investment strategies. It reflects the downward movement of an account over a certain period of time.
Based on Drawdown, investors can determine the ability to maintain their orders. From there, they can decide to continue maintaining or selling the position to avoid large losses.
Number of profitable trades over a specified period of time.