Cost basis - NT7 calculation method is inadequate

[geoninja]

In general, "cost basis" is the break-even price for the actual position one has open. As such, cost basis calculations are expected to keep track of, and reflect any partial profits/losses taken during the life of the position, right until it is finally closed.

Take an ES long position. Following what happens to the position step by step, here is what NT does, and what - I think - it should do in stead:

Execution.............Position......NT cost basis........*Real* cost basis
B 1 @ 1200..............1L...............1200........... ..........1200
B 1 @ 1198..............2L...............1199........... ..........1199
S 1 @ 1200..............1L...............1199........... ..........1198
B 1 @ 1199..............2L...............1199........... ..........1198.5
S 1 @ 1200..............1L...............1199........... ..........1197

This should be enough. Again, cost basis calculations are meant to reflect the real break-even price of the open position, nothing more, but nothing less either. NT falls short here, unfortunately, compared to other platforms.

Looking forward to a more circumspect cost basis calculation algo in NT7.
Geo

[NinjaTrader_Jason]

Hello geoninja,

Can you please enable 'Use FIFO for position avg. price calculations' at Control Center-->Tools-->Options-->General-tab.

Subsequently perform the exact same trades and it should reflect the position prices you have listed under '*Real* cost basis'.

Except for the last price of 1197.5, it will reflect 1199. However I did display 1198 and 1198.5 after the 3rd and 4th orders were executed.

[geoninja]

Hello Jason,
Thank you for your response.

I am sorry, I have since corrected the small error with that last price of 1197.5, as it should be 1197.

A good trader manages positions continuously, may scale into and out of a position step by step to improve its cost basis continuously. But to do this well, one absolutely needs to see the precise break-even point / cost basis of the position at all times. It should be recalculated with every add to and scale out of the position. In other words, both adds to the position, and taking partial profits or losses should trigger the recalculation of cost basis, basically *any* change in position size should. This is imperative. I know no other method of cost basis calculation that could be considered adequate, there is only one way of doing this properly. NT with "FiFO" disabled *should* do this, but it does not: it does not recalculate anything on scaling out, only on adding, a major mistake.

To respond to your suggestion, unfortunately, been there, done that. When 'Use FIFO for position avg. price calculations' is checked, NT does something entirely different from what I would like it to. FiFo is an odd way of doing position averaging really, as it is not really averaging.

FYI, I just tested the following trade sequence, all ES 1-lots, with FiFO enabled:
S 1 @ 1180.50
S 1 @ 1180......................2S, NT cost basis: 1180.25
B 1 @ 1179.75.................1S, NT cost basis: 1180

In reality, my cost basis on the remaining short is 1179.75, so the number given by NT is not what I am interested in.

Geo

[NinjaTrader_Kyle]

Hi geoninja,

Can you clarify for me where you're seeing 'Cost Basis'?

Are you sure you're not actually tracking average entry price?

[geoninja]

Hi Kyle,
Indeed, NT documentation keeps mentioning "average entry price".

This is where this becomes a philosophical problem.

Yes, the *programmer* is right in that NT currently tries to display the "average entry price", and may well calculate that correctly.

The problem is that me, the *trader*, I seriously, absolutely do not care about the average entry price of my position. However, what I do, absolutely want to know at all times, is the break-even price of my current position. The price above/below which I need to close the position to make money.

Take a nice trend day, during which I may well scale into and out of a position 10-20 times during the day, and the size of the position can easily vary by a factor of 5. For such a carried position, the "average entry price" calculated by NT (for contracts currently held) has nothing to do with the break-even price (a.k.a. cost basis) of the position, it is only half the truth. But I need to be able to see the whole truth when trading!

What I need when trading is not average entry price, but position break-even price, which should update on every change in position size, not only on adds. It is a logical fallacy to display the average entry price calculated the way currently NT does it.

The other part of the philosophical problem is that it is me, the trader, who pays for the program...

Thus you may feel it is not a *bug* in a technical sense, but it certainly is a logical bug for me, the trader.

Than you for your response.

Geo

[NinjaTrader_Jason]

Hello Geo,

I will forward your suggestion to display cost basis instead of average entry price to Development to put it on the list of future considerations of the software.

Thank you for your feedback.