Equity Curve
An equity curve is a graphical representation of the change in the value of a trading account throughout a time span. An equity curve with a reliably positive incline regularly demonstrates that the trading strategies of the account are productive, while a negative slant shows that they are generating a negative return.
Breaking Down Equity Curve
Since it presents performance data in graphical form, an equity curve is great for giving a quick analysis of how a strategy has performed. Additionally, numerous equity curves can be utilized to survey different trading strategies performance and risk.
Equity Curve Calculation
Expect a trader's starting capital is $25,000 and their most memorable trade of 100 shares had an entry price of $50 and an exit price of $75. Commission on the trade is $5
The trade is kept in a bookkeeping sheet as follows:
Starting capital = starting capital - ((entry price x qty of shares) - commission)
- $25,000 - (($50 x 100) - $5)
- $25,000 - ($5,000 - $5)
- $25,000 - $4,995
- $20,005
Starting capital = starting capital - ((exit price x qty of shares) - commission)
- $20,005 + (($75 x 100) - $5)
- $20,005 + ($7,500 - $5)
- $20,005 + $7,495
- $27,500
Rehash the above cycle for each new trade.
Trading the Equity Curve
All trading strategies produce an equity curve that has winning and losing periods. The visual representation is like a stock chart. Traders can apply a moving average, either simple or exponential, to their equity curve and use it as an indicator.
A simple rule could be acquainted with stop the strategy trading on the off chance that the equity curve falls below the moving average. When the equity curve moves back over the moving average, the trader might need to begin trading the strategy once more. Trade automation software permits traders to backtest their strategy to perceive how it would have performed on historical data. This ordinarily incorporates the ability to produce an equity curve for every strategy utilized.
Trading signal rules could be reinforced by adding one more moving average to the equity curve and waiting for a crossover of the two lines before a decision is made to stop or begin the strategy. For instance, on the off chance that the fast moving average crosses over the sluggish average, the trader would start or recommence their strategy, and assuming the fast moving average crosses below the sluggish average, they would halt their strategy.
