How do you rate yourself as a trader?
Good? Bad? Mixed?
And what’s the best yardstick to measure our performance with?
The obvious answer would be how much money we’re making. And sure, that’s the reason most of us are doing this. There’s not much point in trading if we’re not trying to make money!
But profit is a pretty blunt instrument in terms of giving us advice on where to improve.
We can stare at the P&L figure at the bottom of our balance sheet all we like, but it doesn’t give us much information on what we’re doing right, or what we’re doing wrong…
Even the best traders have bad weeks… months… even years…
If we can score how we’re doing in different areas, we can pick out where our strengths are, and where we’re weakest…
And that’s how we really make changes in our profitability.
So, here’s some extra data to track in your trading journal…
It might sound like it’ll be a faff – but really, these can be very easily added to your trading records, and (trust me!) there can be a huge amount of satisfaction found in working towards improving these figures (especially through those tough times when the profit figure isn’t looking so great).
1. Number of winning vs losing trades
The success rate of your trades is an important number to have in order to monitor improvements in other areas of trading.
There’s a general view that you’ll want to win more often than you lose – but there are many successful traders out there who’ll take lots of small losses and fewer bigger winners. What matters is how this figure balances with your average win/loss size (see number 3 below).
2. Largest number of consecutive winners and losers
Take a look at when these happened – what were the market conditions at the time?
This will give you a picture of what markets you’re good at trading, and which ones you should be wary of. How can you protect yourself against the poor market conditions, and maximize the benefits of the good conditions?
3. Average win size vs average loss size
I often bang on about how the 2:1 risk-reward principle should be viewed as an ‘aim’ rather than a ‘rule’.
Achieving double the reward on winners than the loss on losers is a tough call for any trading strategy to maintain – it’s certainly a lot harder than many trading gurus would have you believe.
However, if your losses are too big and keep wiping out all your gains –you’ve got a problem. This figure needs to be carefully balanced with your success rate (number 1, above) to achieve profitability.
4. Largest and longest draw-down periods
This would be the greatest drop from an equity curve peak to a low point – i.e. how much you’ve fallen from a maximum account figure.
It’s one way of measuring risk – and can be a very valuable tool.
Being profitable with small draw-downs means that risk-adjusted returns were probably good. Being profitable with huge draw-downs is a warning flag – you could be running too big a risk to achieve those profits.
5. Holding time
I have an idea of what kind of trader I am. But how long am I actually holding my trades? Sometimes taking a look at my average holding time is a genuine surprise to me!
6. Holding time of winners vs holding time of losers
This is an interesting one, and will give some clear info about whether I’m holding on to trades for too long or not long enough.
Do I tend to hit winners quickly, and hold on to the losers, hoping they’ll come good? If this is the case, I should be looking to get out of my trades sooner.
Or are my losses the trades I got out of fast? Perhaps I should be giving them a bit more time to come to fruition…
7. Trading session of winners vs trading session of losers
If you trade at different times of the day, this can be really helpful.
Are you making all your money in the morning session – and then frittering away your profits in the afternoon?
You can look to drop the duff trading sessions, and focus on the good ones.
8. Stake size on winners vs stake size on losers
All traders have a comfort level, and a discomfort level, and many of us are guilty of ‘bottling it’ when the stake levels get too high. This doesn’t necessarily mean you’re taking on too much risk – in fact, it may be completely unrelated to the size of your trading fund and your risk profile: it could be as simple as the number just sounding too big and scary!
If you notice that your more successful trades are the smaller ones, you could have this problem.
I strongly recommend that you keep track of these eight pieces of data. If you keep trading records, the information should all be there already.
By following these figures, you can see improvements in your trading before they even show up in your bottom line – and when things go wrong, these numbers will tell you what needs fixing.
I look forward to hearing how you get on with them.