Compound Annual Growth Rate. The year-over-year growth rate of an investment over a given period of time. It is calculated by the formula:

CAGR=(Ending Value/Beginning Value)^(1/# of years)-1

This figure represents the rate at which an investment would have grown had it grown consistently at a steady rate. It can be considered as a way to smooth out returns. For example, suppose a $20,000 investment is made on March 1, 2004. On March 1, 2005 the portfolio was valued at $25,000. By March 1, 2006 it had grown to $27,000, to $30,000 by the same date in 2007, and finally to $32,000 in 2008. In this case the CAGR is the ratio of the end value to start value, ($32,000/$20,000), raised to the power of ¼ since the designated time period here is four years, minus one. The result is approximately 0.3375, or 33.75%. The investment did not grow by this percentage every year. This rate represents the smoothed annualized gain for this four-year period.

This formula can be used for any type of investment, including gains made in forex trading.