In the fast-paced world of financial markets, understanding the intricate details of performance ranking calculations can make all the difference for traders and investors. 

We had the privilege of sitting down with Bozhidar Bozhkov, a team member of WSOT and seasoned trading specialist with over 8 years of experience, to uncover the hidden truths behind these calculations. 

Bozhidar’s insights shed light on why these calculations matter, the formulas that drive them, and the significance of their differences.

Q: Please tell us a little bit about yourself and your background in the financial market.

A: Certainly. I’ve been deeply immersed in the world of financial markets for over 8 years now. My journey began with a role at a prestigious Big Four consultancy firm, EY, where I served as an assurance assistant. While there, I gained valuable insights into the intricacies of financial operations and developed a strong foundation in the field. 

However, my passion for the dynamic realm of financial markets led me to take a more focused path. I transitioned into the brokerage industry and joined the esteemed JFD Group. This move allowed me to get up close and personal with the heart of financial trading. I had the privilege of delving into the internal processes of the brokerage business, gaining a comprehensive understanding of how trading operations function. 

This hands-on involvement granted me profound insights across various dimensions, from the interconnectivity of trading terminals with liquidity providers to the pivotal role of risk monitoring and financial exposure assessment.

Q: Why do you believe it is essential to shine a light on the topic of calculations of equity performance?

A: Equity performance calculations give traders and investors a clear and quantifiable measure of their success. By understanding how their trading decisions translate into equity growth or decline, individuals can assess the effectiveness of their strategies and make informed adjustments.

By tracking equity changes over time, traders can gauge the impact of different market conditions on their portfolios. This information empowers them to refine risk management strategies, optimise position sizing, and make well-informed decisions in varying market scenarios.

Moreover, understanding equity performance calculations is vital for those participating in trading tournaments or competitions. Clear and standardised equity measurement methods ensure a level playing field and accurate ranking of participants, promoting fairness and healthy competition.

Q: What is the most used formula in trading competitions?

A: The predominant formula frequently employed in other trading competitions revolves around calculating the trader’s overall return based on their equity performance. This formula considers whether any balance operations were conducted during the duration of the competition.

When balance operations are absent throughout the competition, the equity performance is gauged by subtracting the trader’s initial equity from their concluding equity and dividing the outcome by the initial equity. This calculation provides a comprehensive representation of the trader’s total return.

However, the formula comes with a notable drawback when balance operations are introduced. It lacks the utilisation of a fresh performance base, resulting in the inadequate weighting of the profit and loss (P&L) generated between the occurrences of balance operations. Instead, the total P&L is proportionally weighted to the beginning balance, augmented by the net funds derived from the balance operations.

Formula: Total P&L / (Beginning Balance + Deposits – Withdrawals) *100

Q: What is the formula used by WSOT?

A: If no balance operations transpire during the tournament duration, the formula computes the trader’s total return by calculating the difference between their initial and concluding equity. This difference is then divided by the initial equity.

When balance operations are executed, the formula adopts a more dynamic methodology. Each time a balance operation unfolds, a fresh performance base is established, serving as the foundation for calculating the performance percentage within that specific period. The tournament is partitioned into separate performance periods, typically spanning a week.

Here, a distinctive feature arises: when a deposit is made, the performance base is constructed at the commencement of the performance period – assuming deposits are made before any P&L is generated for that period. Conversely, when funds are withdrawn, the base is formulated at the culmination of the performance period in question – or in other words assuming that withdrawals are made after all the P&L is generated for that period. Hence in case withdrawals are made, the last performance base is used for the current period, and the new base will be used for the next period.

This approach ensures that each balance operation effectively triggers the establishment of a new performance base. Consequently, the performance percentages for varying periods are accurately calculated based on distinct performance bases. These distinct performance percentages are then aggregated by summing the returns from all the individual performance periods.

Q: Why is it important to know the difference between the two formulas?

A: Understanding the distinction between the two formulas holds pivotal importance due to the significant disparities in their methodologies. These distinctions impact the accuracy and reliability of performance assessments in the context of balance operations during a trading tournament.

The WSOT method and the alternative approach diverge fundamentally in their treatment of balance operations, yielding different performance results. Delving into these differences reveals the key reasons why comprehending these methodologies is essential:

Conservative Accuracy of WSOT Method: The WSOT method adopts a conservative stance, which results in more precise and reliable performance outcomes when balance operations occur. This heightened accuracy is attributed to the dynamic recalibration of the performance base each time a balance operation takes place. As a consequence, the performance results accurately reflect the specific performance period, ensuring a comprehensive and realistic evaluation.

Understated Performance vs Overstated Performance: The crux of the distinction lies in the manner in which the base for performance calculations is adjusted. In the WSOT approach, each balance operation begets a new performance base, encapsulating the changing dynamics of the trader’s account. This approach prevents potential overstatement of performance, ensuring that the influence of balance operations is accurately weighted.

Conversely, the alternative approach, where the base is merely augmented by net balance operations, may lead to overstated performance results. By comparing a multi-period P&L with a single base, this approach fails to reflect the dynamic shifts occurring due to balance operations accurately.

In essence, comprehending the nuances between these two formulas empowers traders with a heightened awareness of how balance operations influence performance evaluations. This knowledge is crucial for obtaining a realistic depiction of trading success, free from skewed or unrealistic performance outcomes. By distinguishing between these methodologies, traders can make more informed decisions, analyse their progress accurately, and ultimately fine-tune their strategies for enhanced performance.

Q: What objective does WSOT aim to achieve by adopting the more intricate formula for calculating equity performance percentage?

A: The primary objective of WSOT in adopting the more intricate formula for calculating equity performance percentage is to provide traders with a more accurate, comprehensive, and reliable representation of their trading success, particularly in scenarios involving balance operations during the course of a trading tournament.

The implementation of this complex formula aligns with WSOT’s commitment to delivering a precise assessment of traders’ performance by addressing the limitations inherent in simpler approaches. By considering the distinct impact of balance operations on performance calculations, WSOT aims to achieve the following goals:

Realistic Reflection of Performance: The complex formula captures the nuanced effects of balance operations on a trader’s equity performance. This approach ensures that each performance period is accurately weighted, reflecting the actual contributions of trading activities, deposits, and withdrawals.

Conservative Evaluation: WSOT’s method takes a conservative stance, providing traders with a performance assessment that is more likely to be understated rather than overstated. This conservative approach is in line with industry best practices, promoting transparency and a reliable representation of performance.

Fair Competition: In a competitive trading environment, fairness and accuracy are of paramount importance. WSOT’s complex formula ensures that all participants are evaluated based on consistent and accurate criteria, fostering a level playing field for all traders. 

Example of WSOT’s Equity Performance Calculations 

In conclusion, Bozhidar Bozhkov’s insights shed light on the significance of understanding performance ranking calculations. These calculations aren’t mere numbers; they are the compass guiding traders through the labyrinth of financial markets. 

By grasping the intricacies of these formulas, traders can make informed decisions, accurately assess their progress, and strive for continuous improvement in their trading strategies. 

The WSOT method’s commitment to accuracy and fairness underscores the industry’s dedication to transparency and excellence in trading competitions.