CAGR (Compound Annual Growth Rate)
Also known as: roi, annualized return, return on investment, compound annual growth rate, compounded annual return
What is it?
CAGR, or Compound Annual Growth Rate, is the single smoothed yearly rate that would have grown your starting balance into your ending balance over a number of years, as if it had earned the exact same rate every year and compounded along the way. It exists because raw total return hides time. If one account grew 100 percent and another grew 50 percent, the first looks better until you learn the first took five years and the second took one. CAGR strips that out so you can compare results over different spans on equal footing.
= ($16,100 / $10,000)1 / 3 − 1 = (1.61)0.333 − 1 ≈ 17.2% per year
For example, if you start with 10000 dollars and finish with 16100 dollars after three years, your total return is 61 percent, but your CAGR is about 17.2 percent per year, because compounding does some of the lifting each year on top of the last. The common pitfall is reading CAGR as the return you actually felt year to year. It is a smoothed average, not a real path, so an account that went up 80 percent then crashed back can still show a tidy positive CAGR while the equity curve was a roller coaster. That is why CAGR should always be read next to drawdown, which shows the worst dip along the way.
CAGR is also strictly backward-looking. It summarises what already happened in a sample and says nothing about what comes next. Past performance does not guarantee future results, no strategy is risk-free, and your capital is at risk on every trade.
Why it matters: CAGR turns messy multi-year results into one comparable yearly rate, so you can judge strategies and accounts of different lengths on the same scale.
CAGR = (ending balance / starting balance)^(1 / number of years) - 1
CAGR is the headline number most traders use to compare strategies, so misreading it leads to backing the wrong system.
Real-world example
Growing 10000 dollars into 16100 dollars over three years is a 61 percent total return but a CAGR of about 17.2 percent per year, a historical figure that does not guarantee future results.
How SignalBots handles it
Where SignalBots shows CAGR on a strategy or signal it is a backward-looking historical estimate, displayed beside drawdown and linked to /risk-warning, never a forecast of what your account will do next.
Pro tip
Always pair CAGR with maximum drawdown, since a high yearly rate means little if surviving the worst dip along the way was nearly impossible.
Common pitfalls
Treating the smoothed CAGR as the actual year-by-year return and ignoring how violent the equity curve really was.
Frequently asked questions
What is the difference between CAGR and total return?
Total return is the raw percentage gain over the whole period, while CAGR converts that into a single yearly rate that accounts for compounding. CAGR lets you compare results that took different amounts of time.
Is a higher CAGR always better?
Not on its own, because a high CAGR can come with brutal drawdowns that would be hard to sit through. Read it together with maximum drawdown and the length of the track record before judging it.
Does CAGR predict my future returns?
No. CAGR is strictly backward-looking and only summarises what already happened in a sample. Past performance does not guarantee future results and your capital is at risk.
Why is CAGR lower than my total return percentage?
Because total return is the full multi-year gain, while CAGR spreads that gain across each year with compounding. A 61 percent total return over three years is only about 17 percent per year as a CAGR.
How many years do I need for CAGR to mean something?
The more years and trades behind it, the more reliable it is, since a short or lucky sample can produce a flattering rate. Treat a CAGR built on just a few months with healthy skepticism.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.