How to calculate annualized return
Annualized return = (1 + Total return)^(Days in year ÷ Days held) − 1
Days in year = 365 (calendar) or 252 (trading days)
Worked example
- A position returned 18% over 540 calendar days.
- Annualized = 1.18^(365 ÷ 540) − 1 = 11.84% per year.
- An index going from 1,468.36 to 903.25 in one year is (903.25 ÷ 1,468.36) − 1 = −38.5%.
How to interpret annualized return
Annualising answers “what rate per year would produce this result?”. It makes a 3-month trade comparable with a 3-year one — but for periods shorter than a year it extrapolates. A 5% gain in two weeks annualises to well over 200%, which says more about the formula than about the strategy.
Limitations and common mistakes
- Use 252 days when the holding period is counted in trading days, 365 when counted in calendar days — mixing them inflates or deflates the result.
- Annualised returns of short trades are not achievable rates unless you could repeat the trade back-to-back all year.