Return on Investment (ROI)

The Formula

ROI is calculated as: (Net Profit ÷ Cost of Investment) × 100. If you invest £1,000 and your return is £1,150, your net profit is £150. Your ROI is (150 ÷ 1000) × 100 = 15%.

The simplicity is the strength. ROI lets you compare completely different investments on an equal basis — whether you're evaluating a stock position, a property purchase, or a trading strategy.

ROI in Trading

For traders, ROI typically refers to the return on your trading account over a period. If you start the month with £10,000 and end with £10,600, your monthly ROI is 6%. Simple enough — but context matters enormously.

A 6% monthly return with a 5% maximum drawdown is excellent. A 6% monthly return with a 40% drawdown along the way is terrifying — you nearly lost half your account to make 6%. This is why ROI alone doesn't tell the full story. You need to consider it alongside risk metrics like drawdown and the Sharpe ratio.

Realistic Expectations

One of the most important conversations in trading: what's a realistic ROI? Professional fund managers typically target 10-20% annually. Retail traders who consistently achieve 3-5% per month are in the top tier. Anyone promising 50% monthly returns is either lying or taking catastrophic risks.

Setting realistic expectations from the start protects you from two things: the disappointment that leads to quitting a good strategy too early, and the recklessness that comes from chasing unrealistic targets.

Annualised vs Absolute ROI

A 5% return over 3 months and a 5% return over 12 months are very different achievements. Annualised ROI standardises returns to a yearly basis for fair comparison. A 5% return over 3 months annualises to approximately 22% — which puts it in proper context against other investments or strategies.