A graph of your total investment capital over time, should show a smoothly varying line, provided you haven’t deposited or withdrawn cash in that time. If you had, then that same graph would show step changes, representing those cash-flows. Unless accounted for, these step changes make it impossible to determine things like capital growth, profits, etc.

The same is true if you add or remove shares to or from your portfolio without paying or receiving cash for them. Doing this also creates step changes in the total market-value of your trading account.

RuleTrader handles cash-flows and non-cash share transactions by effectively reversing them, to remove the steps, before calculating many of the report parameters. So deposits and withdrawals are reversed, and share additions/removals are treated as costs/income (as though the shares had actually been bought/sold) to give only the profit that was derived from holding and trading those shares.

While this works for calculating the absolute change (gain/loss) in your account’s capital over time, it does not work with returns (i.e. percentage changes), as these depend on the starting value. To handle this, for reporting purposes RuleTrader maintains two copies of your trading account’s changing capital value series, over time:

• The gain adjusted capital series adds and subtracts cash-flows and share movements to revere their effect and is used to calculate the absolute change in values.
• The return adjusted series removes the effect of cash-flows and share movements by multiplying the capital value series by a varying scale-factor. This series is used to calculate accurate ratios and percentage returns.

You don’t have to worry about the maths; the important thing is that RuleTrader reports provide accurate results, without any distortion that would otherwise be caused by cash-movements and non-cash share transactions (it’s as though they never happened).

When values are  totalled across multiple accounts, the transactions used to fund trading accounts that start after the start of the reporting period have the same distorting effect on the total capital value series for all accounts, as cash-flows do for one account. So they are treated in the same way and these funding transactions are reversed to produce the ex-flows capital figures.