Time-weighted return explained: why deposits don't count as gains

The problem with "the account went from 1,000 to 3,000"

Suppose an account starts at $1,000, the owner deposits $1,500, and the account ends the month at $3,000. Did the trading make 200%? No. Trading made $500 on whatever capital was in the account at the time. The other $1,500 was a deposit. Yet "1,000 to 3,000" is exactly what a screenshot of the balance shows, and it is how many sellers describe their results.

The reverse happens with withdrawals. A trader who takes profit out every month can look flat or negative on a balance chart while actually compounding steadily. Any measure that mixes cash flows with trading results is useless for comparing two accounts.

What time-weighted return does

A time-weighted return (TWR) chops the history into sub-periods at every deposit or withdrawal. Within each sub-period, the return is simply the change in value divided by the value at the start, and no cash moved, so that return is purely trading. The sub-period returns are then chained together by multiplying: (1 + r1) × (1 + r2) × ... − 1.

The result is the return a fixed pound or dollar would have earned if it had been in the account the whole time. Deposits and withdrawals drop out completely. A $500 account and a $50,000 account running the same Expert Advisor get the same TWR, which is why it is the only fair basis for a ranking.

Reading the growth chart with flows

Because flows are stripped out of the index, the chart marks them separately. Deposit and withdrawal markers sit on the timeline so you can see when money moved without that movement bending the line. If you see a big deposit right before a steep climb, the climb is still honest in TWR terms, but it tells you the trader's risk per trade may have changed.

The money-and-scale figures in the Glance hub are shown in real currency for the same reason. TWR answers "how good was the trading"; the balance answers "how much money is actually in this account". You need both, and you should never let one stand in for the other.

TWR is not money-weighted return

There is another honest measure, money-weighted return (the internal rate of return), which does account for the size and timing of deposits. It answers a different question: how did this particular investor's money do, given when they added it. That is the right number for a personal portfolio, but the wrong one for judging a strategy, because it rewards and punishes timing decisions that have nothing to do with the trading.

For comparing traders, signal providers or forex robots, use TWR. For working out whether your own copy of a strategy made you money, use money-weighted. They will rarely agree, and that is fine.

Where TWR can still mislead

TWR is fair, not omniscient. A few things to keep in mind when reading it:

• A very small starting balance can produce enormous percentages from tiny dollar gains. Check the real balance in Glance before being impressed by a four-digit return.
• Chaining sub-periods means one extreme sub-period dominates. The monthly calendar shows whether the return was spread out or concentrated.
• TWR says nothing about drawdown. A 50% TWR with a 60% maximum drawdown was a coin toss that landed well. Read maximum drawdown explained next.
• Open-position equity is folded into the index, so a large floating loss shows up as a dip even before it is realised. That is intentional and is one of the ways grid and martingale systems get caught.

Related metrics on the page

The page also shows average daily return and Sharpe ratio, both built from daily TWR, and the per-trade arithmetic and geometric holding-period returns (AHPR and GHPR) that win rate is lying discusses. All of them inherit TWR's indifference to deposits, so they can be compared across accounts of any size.