Return on Investment (ROI) is one of the most quoted metrics in trading, and at first glance, it seems logical to compare strategies based purely on their ROI. After all, higher returns mean better performance — right? Not quite. While ROI is an important part of evaluating a strategy, using it in isolation can lead to dangerous misconceptions and poor decision-making. This article breaks down why ROI alone is not a valid way to compare trading strategies and what metrics should be used alongside it.

What is ROI in trading?

ROI in trading is typically calculated as:

ROI = (Net Profit / Initial Investment) x 100

For example, if you start with £10,000 and end with £12,000, your ROI is 20%. It shows the percentage gain (or loss) relative to your starting capital. Simple and appealing — but also misleading without proper context.

Why ROI alone can be deceptive

1. Ignores risk taken:
One strategy may produce a 30% ROI with low drawdowns and tight risk controls. Another may generate 40% ROI but expose your account to massive risk, with 50% drawdowns or overleveraging. ROI doesn’t reflect how safely that return was achieved.

2. Doesn’t account for time:
A 15% ROI over a week is very different from 15% over a year. Comparing the two without adjusting for time (e.g. via annualised return or compounding) leads to invalid conclusions.

3. Masks volatility and inconsistency:
A strategy may have earned 50% ROI due to a few lucky trades, while another produced 20% consistently month after month. The second is usually far more valuable — but ROI alone doesn’t tell you that.

4. Overlooks maximum drawdown and risk of ruin:
A high-ROI strategy that incurs a 60% drawdown is often unacceptable to professionals, no matter how high the end result. ROI doesn’t show the pain or recovery time required.

5. Can be distorted by starting capital or leverage:
A trader using extreme leverage may show a massive ROI — but it could be due to luck or unsustainable practices. Comparing this to a low-leverage strategy isn’t apples-to-apples.

What metrics should you compare alongside ROI?

1. Risk-adjusted return metrics:

• Sharpe Ratio: Measures return per unit of volatility.
• Sortino Ratio: Focuses only on downside risk.
• Calmar Ratio: Compares annual return to maximum drawdown.

2. Drawdown:
Shows the deepest loss from peak to trough. A high ROI with minimal drawdown is more impressive than one with high volatility.

3. Consistency (Win rate and expectancy):
Evaluate whether returns came from one-off trades or a reliable edge. A strategy with a lower ROI but high consistency may be more scalable.

4. Time-adjusted return:
Use CAGR (Compound Annual Growth Rate) to compare returns over different time periods more accurately.

5. Trade frequency and scalability:
A strategy that returns 20% but only trades once a year may be less practical than one that returns 15% through steady monthly trades.

Example: Comparing two strategies

Although Strategy A has a higher ROI, Strategy B is far superior in terms of risk-adjusted return, stability, and reliability. Comparing them purely on ROI would lead to the wrong choice for most traders.

Conclusion

Comparing strategies by ROI alone is not a valid or effective way to evaluate performance. ROI is just one piece of the puzzle — and without context, it can be misleading. A good strategy should be judged not just by how much it returns, but how it earns those returns: the risk involved, the consistency, the time factor, and the psychological sustainability. Traders who evaluate with a full picture outperform those who chase ROI alone.

For a deeper understanding of professional strategy evaluation and performance metrics, enrol in our Trading Courses at Traders MBA — and learn how real traders compare strategies the smart way.