Total gain versus annualised return

Two numbers that look alike

Every track record opens with a big percentage. On Myfxbook it is labelled Gain, on a broker page it may be called total return, and in an advert it is simply the number in the largest font. It almost always means the same thing: how much the account has grown since the day it started, however long ago that was.

That is a cumulative figure. It says nothing about speed. A 120% gain can be an exceptional result or an ordinary one, and you cannot tell which until you know how many years it took.

The number that answers the speed question is the annualised return: the steady yearly rate that would turn the starting balance into the final balance over the same period.

Converting one into the other

The conversion needs only the total gain and the age of the account in years:

annualised return = (1 + total gain) ^ (1 ÷ years) − 1

Take an account that shows +120% after three years. Growth factor 2.2, cube root 1.30, so the annualised return is about 30% a year. Still strong, but a very different sentence from “120%”.

It works in reverse too. A strategy that holds 30% a year for three years ends at 1.3 × 1.3 × 1.3 = 2.197, which is the +120% headline again.

Why account age changes everything

Annualising a short record produces numbers that are mathematically correct and practically meaningless. An account that is up 40% after four months annualises to (1.4)³ − 1 = +174% a year. Nothing about four months of trading tells you whether the next eight will look the same.

Myfxbook shows a related figure next to Gain: Daily and Monthly, the compound daily and monthly rates that would have produced the account’s gain. Their own help page uses an account that was 22 days old, up 94% and showing 3.07% a day. The arithmetic is right; extending it into next month would be fantasy. The younger the account, the less these rates mean.

Compounding and its illusion

Compounding means each period’s return is earned on the previous period’s result, not on the original deposit. Over long stretches this is what makes modest monthly numbers add up.

It also makes monthly claims easy to misjudge. 5% a month is not 60% a year: 1.05 multiplied by itself twelve times is 1.796, so it is +79.6%. That sounds like good news, but it cuts both ways. A strategy advertised at 5% a month is implicitly promising roughly 80% a year, every year, and very few strategies in the world have done that for long.

Compounding also assumes the profits stay in the account. If you withdraw them monthly, your balance grows by the simple sum, not the compounded one.

What to ask when only one number is shown

When a track record gives you a single headline, ask four questions before you compare it with anything:

1. Since when? The start date turns a cumulative gain into a rate.
2. Annualised or total? If the label does not say, assume total.
3. Were profits left in? Compounded figures assume they were.
4. How was the gain measured? Deposits and withdrawals can distort it, which is the subject of the fifth lesson in this series.

On our strategy pages, every figure links through to the live Myfxbook account, so you can check the start date yourself and do the conversion in a minute.