Trade Performance Index

The Trade Performance Index (TPI) was developed in order to assess how well each service performed compared to the others when only looking at their trading performance. Specifically, the return they achieved on their trades irrespective of any other issues such as bank size or portfolio allocation.

That said, we also felt it was important to take into account the risk associated with achieving those results because, irrespective of how spectacular the result may be, risk is ALWAYS a factor in trading. So we also decided to account for this, thereby making the TPI a risk-adjusted measure of performance.

The data from each the service's trading performance that we are going to use to work out their TPI is shown in the first calculation box on the left (the results are from an actual advisory service). We begin by setting a "level playing field", so that a service's result is influenced only by their trading performance. As such, we "allocate" each service a bank of $10,000.

With this as our starting point, we then calculate the average return achieved by the service by multiplying the $10,000 starting bank by their average percentage return per trade, which is then multiplied by the average number of trades done per month.

This gives us a gross "income" figure for the month. From it, we have to subtract "costs", which are brokerage and subscription fees. To calculate these, we multiply the average number of trades per month by the average brokerage and then add on the monthly service fee.

The service's net "income" is then calculated by subtracting the result of Step 2 from the result of Step 1. This, however, is only a "raw" figure that, while representing the service's return, doesn't allow us to make a valid comparison between one service and another. 

This is done by making the net income from Step 3 relative to the original bank of $10,000, which is the reference point for this Index. To achieve this, we simply divide the result from Step 3 by $10,000..

While we now have an Index figure, it is not yet risk-adjusted. In other words, we have not yet taken into account the risk associated with achieving the figure in Step 4. To do this, we first need to determine our measure of risk and, as with the Sharpe Ratio, we use the Standard Deviation. In this case, we want to measure the risk (or volatility) associated with the individual returns for each trade made by the service, so we take the Standard Deviation of those returns as our measure of risk. In this case, it is 1.2%.

With that in place, we are then able to adjust our initial Index figure for risk, which is done by dividing Step 4 by 1.2%, which gives us our final Index figure of 8.125. As a guide, anything above 2.00 would be considered acceptable.