Return on Equity (ROE) is not the same as Realised PNL (Profit and Loss). ROE measures the percentage return on your trading capital, factoring in the impact of leverage, while PNL represents the actual financial gain or loss from 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 measure that indicates the return on your equity. It shows how much profit you have 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 have realised from your trades. It is calculated based on the difference between your Average Entry Price and Exit Price for each trade, considering the number of contracts traded, the multiplier, and fees. PNL is a direct measure of 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?
It is possible to see a higher ROE% than your PNL because ROE% takes into account the leverage you have used, while PNL calculation does not. For example, if you have a 2% PNL and you used 10x leverage, your ROE% would be 20% (2% * 10). In this scenario, the ROE% is higher than the PNL due to the impact of leverage.
Similarly, if two positions have identical values but different leverage levels, the position with higher leverage will show a larger ROE%, while the actual PNL amount will remain the same for both.