BlueBlood Trading Signals Blog

Explaining reinvestment strategy

April 03, 2020 | reinvesting, strategy

I am generating performance of the strategies as not reinvested and I’m doing it in order to be able to compare strategies returns instead of time value returns.

Time value returns are returns that are not much visible in the beginning of the trading, but become larger as time goes due to reinvestment.

In other words, the sooner you start, the bigger your returns will become over time IF you reinvest.

For one of the examples, if you have started in January of 2019, not reinvested returns at end of March 2020 would have been 36.1%, but if reinvested at the end of each month - 42.1%.

That doesn’t seem much, but let’s consider reinvesting on every trade of a similar strategy and starting in 2016:

Reinvestment returns

That’s over 1,500% over last 13 months! Is it realistic? Yes and no.

Yes, if you manage to avoid drawdowns, because they will also be reinvested.

And no, because big changes in returns also means volatility in them. My experiments in volatility trading are also confirming it.

Take bitcoin arbitrage strategies, for example. They have much lower risk than other strategies and even lower for the portfolio of the arbitrage strategies, BUT if reinvested, max drawdowns can run up and over 100% and for the portfolio of the arbitrage you will need complex architecture.

If to lower that drawdown to acceptable level, let’s say, trade 1/10th of your usual sizing, then returns will become same as if not reinvested, which makes such simplest strategy obsolete.

If you still want to pursue the dragon, please watch drawdowns carefully until and if I prepare built-in sizing for strategies.