Return on Equity (ROE) is not the same as Realised Profit and Loss (PNL). ROE measures your return relative to your trading capital, considering leverage, while PNL reflects the actual financial outcome of your trades. They are related but distinct metrics, each providing valuable insights into your trading performance from different perspectives.
What is ROE?
ROE is a percentage that indicates the return generated on your equity, showing how much profit you've made relative to your initial investment.
The formula for calculating ROE is:
ROE% = PNL % * Leverage
What is Realised PNL?
PNL represents the actual profit or loss you've realised from your trades. It's calculated from the difference between your Average Entry and Exit Prices, factoring in the number of contracts traded, the contract Multiplier, and Fees. PNL directly measures the financial gain or loss from your trading activities.
The formula for calculating it is:
Unrealised PNL = Number of Contracts * Multiplier * (1/Average Entry Price - 1/Exit Price)
Realised PNL = Unrealised PNL - taker fee + maker rebate -/+ funding payment
Can ROE% be higher than the PNL value?
ROE% can be higher than your PNL value because ROE% incorporates the effect of leverage, whereas PNL calculation does not.
- Example: If your PNL is 2% and you've used 10x leverage, your ROE% will be 20% (2% * 10). In this case, leverage amplifies the ROE% beyond the actual PNL.
- Similarly, positions with identical values but different leverage will exhibit varying ROE%. The position using higher leverage will display a greater ROE%, while the actual PNL remains the same for both.