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I've put aside 1000 EUR for trading strategy test. Made number of trades where each position was worth 5 EUR. At any moment there was invested from 0 to 80 EUR. Entered all cashflows to XIRR function and it shows 0,14. What does it mean? I suppose it means 14% return from some sum over some period. I assume the period is 1 year, but what is the sum that gives 14%? Should I somehow add funds that sit idle?

For example I bought an asset on 1st of Jan for 5 EUR and in 3 days sold it with 0,2 EUR profit. Cashflows for this trade are:

2021-01-01; -5

2021-01-04; +5

2021-01-04; +0,2

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    $\begingroup$ Welcome! Your question is not completely clear to me. You might want to provide a description (perhaps a simplified example ) of the cash flow data you entered into XIRR. What counts as a Cash Flow? $\endgroup$ – noob2 Jan 15 at 16:22
  • $\begingroup$ Added an example of cash flow data entered into XIRR $\endgroup$ – wilkas Jan 15 at 19:51
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In its simplest form, for a series of irregular and/or intermittent cashflows that defy description in traditional terms (like bond coupons, dividends, etc.)...

XIRR tells you "what interest rate would a bank have to offer to give me the same end result, given all the same cashflows at the same times?".

The implicit and necessary assumption being a constant equivalent interest rate over the whole period.

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  • $\begingroup$ I still don't understand on what amount does that constant interest is based on. 14% from 100 EUR and 14% from 1000 EUR is not the same. $\endgroup$ – wilkas Jan 16 at 7:44
  • $\begingroup$ Or do I understand correctly, that each time I invested 5 EUR for 3 days, equivalent interest rate for same duration same size deposit should be 14% or the XIRR value? $\endgroup$ – wilkas Jan 16 at 7:45
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    $\begingroup$ OK, so imagine you invested 100 on 31/12 and it doubled in January. So you take out half, ie 100 (leaving you with 100). The market falls 10% in Feb, (90) so you put 200 in (290). The market is flat in Feb, but you get a bonus so you put in 1,000 (1290). The market then rises 10% (1419); but you need 500 to help out a friend (919). How much have you had invested, the "correct amount"? The whole point of XIRR is to create a consistent and intuitive measure of returns, when there is no such capital figure because it itself changes over time. $\endgroup$ – demully Jan 17 at 1:21

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