We have already mentioned many tools that help an experienced trader analyze the market and choose successful strategies. Today we will look at another one of them. To understand whether a trader’s investment strategy brings a good result, there is a simple formula for calculating – the ROI formula.

ROI (“Return on Investment” – return on investment) – the ratio of return on investment. That is the estimated return on investment. However, the ROI formula does more than just help you understand how profitable or unprofitable an investment is. It can also be used to compare returns on different investments.

Regardless of what trading strategy a trader uses – short-term trading or long-term investments – the ROI formula will show how effective the strategy is and what profit or loss this or that investment will bring.

ROI Formula

You can calculate the profitability ratio using the following formula:

 

ROI is calculated by subtracting the initial value of the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the cost of the investment, then finally, multiplying it by 100.

 

Calculation formula

If we multiply the result by 100, we get the amount in percentage terms.

The ratio shows the profit or loss compared to the amount of the initial investment. A positive ROI indicates a profit, a negative one indicates a loss.

However, for more accurate data, it is necessary to take into account all the costs associated with the investment. For example, commissions in the blockchain network. Sometimes they reach unimaginable sizes. That with small amounts of investment make the transaction completely unprofitable.

In the case of cost accounting, you must first subtract the cost from the initial cost, and then calculate using the formula.

 

Disadvantages of the ROI Formula

The ROI formula is a universal indicator of profitability. But, unfortunately, it does not take into account all points.

So, for example, the ROI indicator does not take into account time periods. The term of investment in coins can be different, but the ROI is the same. In this case, the investor can calculate the coefficient for a certain period of time. For example, the calculation of the profitability of this investment for a particular year.

In addition, it is worth remembering the risks of investing. The coin may be illiquid. In this case, there is a high probability of losing funds even with a good ROI.

Conclusion

Almost every experienced trader uses the ROI formula. Given some of the shortcomings of this tool, it is necessary to use various auxiliary tools. For example, it is worth considering the ratio of risk and reward (link to article) before entering a trade. In addition, keeping a trading journal will help you quickly evaluate the result. A set of auxiliary tools will help a trader make effective investment decisions and develop a successful trading strategy