Cumulative Returns
Cumulative return are used to determine if prices have moved from the downside to the upside or from the upside to the downside.
For each sell date of a price series the cumulative returns are computed using the following procedure:
1. Computes the cumulative sum of gains and losses. The gains and losses for all buy and sell combinations are stored in the Buy and Sell Return Table.
2. Computes the cumulative number of all trades (winning plus losing trades).
3. Divides the cumulative sum of gains and loses by the cumulative number of all trades.
This ratio is called the cumulative return.
For example, suppose the first buy and sell combination lost 10%. After one trade the cumulative sum of returns is -10%, the total number of trades is one so the cumulative return is -10%. Suppose trade 2 was a 15% gain. After two trades the running sum of returns is 5%, the total number of trades is two and the cumulative return is 2.5%. Continuing on suppose after 20 trades the running sum of the returns is -10% so the cumulative return is -0.5%.