6 Things Traders With Day Jobs Should Know About Their Real Growth Number

Your account's growth number may look much better than the truth. On a quiet Sunday, a trader sits at a worn wooden kitchen table with a cup of cooling tea.

The big growth number on the screen brings a warm, proud feeling. Then a small, cold doubt creeps in about all the money added along the way.

A trader who adds money every month cannot read growth the way a one time depositor does. The numbers in this article are a made up example, not anyone's real result. You will learn three ways to read one account, and one question to ask any tracker.

1. Why money added later grows less

Start with a simple idea. Money grows only while it sits in the account. The longer it sits there, the more time it has to grow.

Take a pay cheque that lands on the first day of the month. You move R1,000 into your account that same morning. That money now has a full year ahead of it.

Next month, another pay cheque lands, and you add another R1,000. This second R1,000 has only eleven months left. The one after that has ten months, and so on down the line.

The last R1,000 goes in with just one month to go. It has very little time to grow. A simple figure can still treat it the same as the first R1,000.

So a fair number must weigh each rand by the days it was truly in the account. Money that stayed a year counts for more than money that stayed a month. This is easy to forget when one number sits on the screen.

Do this: write down the date of each deposit you made this year.

2. The number that makes your account look doubled

Here is the first way to measure, and it is the one that feels best. You compare the gain with your first deposit only. It is simple, and that is why it is so popular.

Use our trader again. Over twelve months, R12,000 went in, R1,000 at a time. At the end, the account holds R13,000, so it gained R1,000.

Now set that R1,000 gain against the first R1,000 deposit. The gain is as big as the deposit. On paper, it looks like the money doubled.

It feels warm and proud, but it flatters the account a lot. The gain was earned by all the money in the account over the year. Most of that money arrived later.

Suppose you check the number at the Monday market open and see a doubled account. You might feel bold enough to add more or to trade bigger. A number that looks too good can push you to act too soon.

Do this: when a tracker shows a big growth number, find out which deposit it is measured against.

3. The number that makes your account look weak

Now for the opposite mistake. Some figures compare the gain with all R12,000 you put in. They treat every rand as if it sat there from day one.

Do the sum with our trader. The gain of R1,000 on R12,000 comes to about R8 for every R100 put in. That sounds small next to a doubled account.

It can feel like a weak year, and a tired trader may think the plan has failed. After a sharp news release, that doubt can grow even louder.

But this figure is too low, because late money had so little time. The R1,000 added in the last month sat there for only one month. Yet this way counts it as if it had waited all year.

So one way flatters you, and the other way scolds you. Neither one is honest. A fairer number sits between them, and it comes next.

Do this: add up all the money you have put in and set your gain against that total.

4. IRR: every rand counted from the day it went in

IRR sounds like a hard word. The idea is simple. It counts every rand from the day it went into your account.

Think of a savings jar. Each coin gets its own count of days. A coin that sat in the jar for a full year has had a year to grow. A coin that went in last week has hardly had any time at all.

IRR does this count for your account. Every deposit is counted from the day it went in. Every withdrawal is counted from the day it came out.

Now go back to the example of R1,000 added at the start of each month for 12 months. IRR gives about R1.20 for every R100 a month. Over a year, that comes to about R15.70 for every R100.

This is the honest number. It is not as big as the doubled look, and it is not as small as the weak look. It sits between them because it weighs each rand by the time it was really in the account.

Do this: Write down the date of every deposit you made this year, so you can see how long each one has been working.

5. The one question to ask any tracking site

Sites such as FX Blue and Myfxbook are handy. They follow your trades and show you a growth figure. Most people read that one figure and move on.

I will not guess how any site works out its figure. You do not need to know their maths. You only need to ask one good question.

Here it is. How does it treat money I added later and money I took out? Write it down and keep it close.

Take a pay cheque that lands on the last Friday of the month. You send R1,000 of it to your trading account on the Monday after. By the end of that month, that money has had only a few days to grow. A fair figure has to know that.

Look in the help pages or the settings of your tracker. If the answer is clear, good. If you cannot find an answer, hold the figure loosely. Ask the same question of every tracker you use, so you compare like with like.

Do this: Open your tracker today and find what it says about deposits and withdrawals.

6. How I check my own account

I am Alan, and I built a free tool for this. It is called the Trade Audit, and it works with MT5 accounts. I made it because I wanted a fair number for my own account.

Above your trade history there is a switch for ROI and IRR. The IRR view counts each deposit and withdrawal on its own date. It shows the figure for the period and per year.

It connects with a read only investor password. That password can look at your account, but it can never trade or move money. Setup takes a few minutes.

Pros: It is fair to money added late and money taken out. It also lets you compare one month with another on the same footing.

Cons: It is harder to explain than a simple figure. It can swing a lot on a short history. It describes the past only and never predicts, and a good past figure does not make a strategy safe.

Do this: Open the Trade Audit, switch between ROI and IRR, and write both numbers side by side.

See your own account's real number. The free Trade Audit connects with a read-only investor password and has an ROI and IRR switch above your history. It can look at your account. It can never trade or move money.

Questions traders ask

How do I work out my real account growth when I add money every month?

Money grows only while it sits in the account, so a fair number must count each rand by the days it was really there. Money that stayed a year counts for more than money that stayed a month.

What is IRR and why should I use it for my trading account?

IRR counts every rand from the day it went into your account. Every withdrawal is counted from the day it came out, so the number is fair to money added late.

Why does my account growth number look too big or too small?

If you compare the gain with your first deposit only, the account can look like it doubled, even though most of the money came in later. If you compare it with all the money you put in, it looks weak, because late money had very little time to grow.

Read next

• The free Trade Audit: if you want to do what this article teaches, this is what I use.
• 5 Rules That Stop Traders Repeating My $39,000 Finger Slip
• What clients say: reviews from the Alive FX community.

The numbers in this article are an example, not a result. IRR describes the past and does not predict the future. Forex trading carries risk.