how to deal with equity curves, etc. and withdrawing money from account?

[#1 Trader]

this may be a dumb question, but......

say you keep track of your equity every day. now say you withdraw some money to pay bills, etc.

the withdrawing of the money had nothing to do with the trading method, so just taking the money out and lowering your equity accounting would make the actual trading look less profitable than it really is (drawdowns will appear worse).

how do you guys deal with this? how do you accurately track your trading profitabilty while also accounting for withdrawals?

thanks

 

[Aaron]

Compute your percentage returns every day (or period between withdrawals) as trading profits / account value at the beginning of the day. Then take your daily returns and compound them to get your return over larger periods.

To compound returns, add them to 1, multiply them, and subtract 1. For example, to compound +4% and -2% you would compute

(1 + 4%) x (1 + -2%) - 1
= (1 + 0.04) x (1 - 0.02) - 1
= 1.04 x 0.98 - 1
= 1.0192 - 1
= 1.92%