Fellow Traders,

I recently received a comment and question on my May 2013 Results posting. Esa, from Finland, wanted to know how I would calculate my Return on Invested Capital (ROIC) and determine the total amount of capital used when I held multiple positions during the course of a month. Below I provide ROIC and total amount of capital used calculations for three different scenarios.

In **Scenario #1** I am placing three different trades on the same day. Let’s assume the following:

(1) each trade will be held for 30 days,

(2) each trade requires $5,000 in capital,

(3) each trade generates a 1% ROIC net of all fees and expenses.

What is the total capital used? In this scenario the answer is easy…$15,000. I had three trades, each requiring $5,000 in capital. The ROIC calculation in this scenario is also easy. Each trade had an ROIC of 1% so my total ROIC must also be 1%. My annualized ROIC is 12.17%. This is calculated as follows: [((0.01 x 365) / 30)].

**Scenario #2** is a bit trickier. In this scenario on the first day I place a trade requiring $5,000 in capital. Like in the previous scenario it is held for a period of 30 days. 10 days later I place a second trade. It too requires $5,000 in capital. However, I only have this trade open 20 days. 10 days later I place my 3rd trade. I hold it for 10 days and it also requires $5,000 in capital. Like before each trade generates a 1% ROIC net of all fees and expenses.

What is the total capital used? The answer is $10,000. Here’s how I arrived at that number…[((5000*(30/30)+(5000*(20/30))+(5000*(10/30))))]. Trade D was held for 30 days, Trade E was held for 20 days, and Trade F was held for 10 days. Each required $5,000 in capital. What was my ROIC? It was 1.5%. Each trade generated a return of $50. Thus, to calculate the combined ROIC we simply divide the $150 earned by the $10,000 in average capital required to place the trades. The annualized ROIC is calculated the same way as in Scenario #1. [((0.015 x 365) / 30)].

**Scenario #3** assumes three equal, consecutive trades are made. Trade G is closed out before Trade H is entered. Likewise, Trade H is closed out before Trade I is entered. Each trade lasts 10 days. Each trade requires $5,000 in capital. As before each trade generates a 1% ROIC.

What is the total capital used? The answer is $5,000. I used the same capital 3 times during the month. The ROIC is 3%, one percent for each of the three trades. The annualized ROIC is 36.5%. It is calculated as follows: [((0.03 x 365) / 30)].

So there you have it. If anyone has another way of calculating returns please let me know.

Regards,

Troy