Return of a position or a period is shown as a percentage of the equity this position or period starts on.
As the returns are calculated from the starting equity at the moment the position is opened (Position VS Trade article), the trader’s deposits and withdrawals do not affect the return percentage. That is, a trader can not manipulate its returns by depositing or withdrawing from its account in opportune moments.
Monthly Returns are calculated from day 1 of each month, whereas a position’s return calculation starts from the existent equity at the moment the position was opened.
To perform a Cumulative Return calculation in a period of time, multiplication of returns must be carried out instead of simply summing the returns, the total takes into account the starting equity for each return percentage.
A 10% of 100 (10) is not the same as a 10% of 120 (12).
Therefore, to compensate negative returns, a higher positive return (than the negative obtained previously) is required.
The following table shows the positive return percentage needed to get back to the total amount of investment after a negative return:
If return percentages are summed up, the calculated result will be wrong as it does not take past results into account. Summing up returns means we look at the equity as if it was the same after each return, but it is not. Cumulative profits are also invested to obtain greater returns.
The following table shows an example of a DARWIN with positive and negative returns:
An investment in a DARWIN with those results will obtain a correct cumulative result of +8.16%, although the sum of percentages would give a wrong +10%.
On the other hand, if a DARWIN only has positive returns, it will give more profits that the sum of its returns, profits are being compounded, as it can be seen in this table:
The correct result calculated using multiplied returns is greater than the mere sum of percentages.