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| Dave Rathbun |
 Posted: Fri Apr 14, 2006 7:00 am Post subject: Churn Rate Calculation |
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CFO
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In this post I talked briefly about the new "churn rate" shown on the trader listing and on this page (viewtopic). I looked on investopedia and they don't have an appropriate definition. Essentially the churn rate is a measure of how active a trader is. You can sometimes find this reported in mutual fund information.
When I went looking for a formula, the best I found was this:
| Code: | | Min(total sales, total buys) / ((starting balance + ending balance) / 2) |
It is essentially a measure of buy transactions or sell transactions over the average balance of the portfolio. More details.
When you start with 10K in cash and invest 5K in a stock, that's not churning. When you sell that 5K stock for 6K and reinvest those dollars within the same time frame (a month, in our case) that's churning. So the trick is that you can trade in (buy) or trade out (sell) of a position without churning. But when you do both in the same time frame then you're churning.
So that explains the Min() that is applied to the total sales or total purchases for the month. If all you have done is buy stocks to establish your positions, that's great. No churning is taking place. If next month you sell out of those positions to take profits, again, no churning. But if you buy / sell / buy / sell / buy... within the same month, you're churning. I think I said that already. 
If you start with 10K and make 10 purchases of 1K each, then your total buys are 10K, and your total sells are 0. Taking the min of those two gives you zero, so your churn rate is zero as well. Now if you sell 2 of your 1K positions, you have 10K in and 2K out, so 2K is the numerator in the equation used to calculate churn. But 2K divided by what?
If you started the month with zero holdings, and you invested 10K, then your "average" portfolio balance was 5K. (0 + 10) / 2 = 5 So the churn rate would be 2/5 or 40%.
Why not use just the beginning balance? Because then a portfolio with zero holdings would never show any churn, no matter how many trades were involved. Why not just the ending balance? Because if you invested a lot of money in the month, but started with a small base, then your "average available cash" should be somewhere in the middle.
So anyway, that's the formula as it has been implemented here. I take the baseline portfolio amount (which could be zero) and add to that the baseline adjustment (cash invested) to get the "ending balance", then add that to the baseline (again) and divide by 2 to get the average. (The baseline and adjustment values are explained on your return page.)
So the formula is | Code: | | Min(total sales, total buys) / ((baseline + baseline + new invested cash) / 2) |
Churn rate does not tell you how much you have invested. It tells you what percentage of your portfolio value has been turned over (reinvested) during the month.
Like the other numbers, this will reset to zero at the beginning of the month.
Thoughts? comments? suggestions? |
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| frusnak |
| Posted: Fri Apr 14, 2006 11:12 am Post subject: |
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CFO
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| Does this affect our percentage return for the month? |
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| Dave Rathbun |
| Posted: Fri Apr 14, 2006 1:52 pm Post subject: |
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CFO
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Nope, it's a completely separate calculation. You can ignore it if you want, this is not even something Benjamin asked for. It's something I wanted to see, and I thought others might find it interesting as well.
Your return is calculated based on how well you invest your money.
Churn is calculated based on how many times you reinvest the same money within the month.
The two are not even correlated, meaning someone with a high return doesn't necessarily have a high churn rate, and having a high churn rate doesn't imply that you will have a high return.  |
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| nelaina |
| Posted: Fri Apr 14, 2006 3:14 pm Post subject: |
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CFO
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| i like having it, as well as all of the other stats that are available for us to see about each other. |
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| vetelmo |
| Posted: Sat Apr 15, 2006 10:12 am Post subject: |
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Moderator
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| I really like the churn rate and trades per month stat! Let's me know what I am doing and can compare it with others. |
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| Benjamin |
| Posted: Tue Apr 18, 2006 6:07 am Post subject: |
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Administrator
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| This is cool, as Vetelmo said, it's a great way to compare your trading style. |
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| Dave Rathbun |
| Posted: Tue Apr 18, 2006 6:12 am Post subject: |
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CFO
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| Anybody have a comment specifically about the formula as detailed in the first post? |
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