What Is ROI?
ROI (Return on Investment) measures the percentage gain or loss relative to the initial investment. Formula: ROI = (Current Value - Cost) / Cost × 100%. If you invested $10,000 and it's now worth $15,000, your ROI is 50%. If it's worth $7,000, your ROI is -30%.
How ROI Works
ROI is the simplest performance metric but has limitations: it doesn't account for time (a 50% ROI over 1 month is dramatically better than 50% over 3 years), risk (a 50% ROI with a 60% max drawdown is worse than 30% ROI with a 10% drawdown), or opportunity cost (a 50% ROI when the market returned 100% means you underperformed).
Why It Matters for Traders
While ROI is useful for quick comparisons, serious traders use risk-adjusted metrics (Sharpe Ratio, Sortino Ratio) and benchmark-relative measures (alpha). Annualized ROI allows comparison across different holding periods. Always calculate ROI net of all fees, slippage, and funding costs — gross ROI is misleading because it ignores the real costs of trading.
