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Gauging trading performance

There’s a recent post from the SMB blog that brings up an issue a lot of traders have – or at least think they have. Namely, they want to know how they are doing with their trading in terms of when they’ve reached a degrees of success. Here’s the main part of the query that came in from the trader asking the question:

I have been profitable every month since and including August of this year. Month to date December I am profitable as well. Before that I saw trickles of black but was always losing on balance and never had two consecutive profitable months until recently. I would greatly appreciate if you could shed some perspective on how I am doing based on my results. I am taking the money up every month so the only way to assess my results is based on percentage gains for a given month based on the account size traded that month. 2011 is my 4th year as a developing trader. For August through December (MTD) I sat down to trade 76 days and took 118 trades averaging 1.55 trades per day. My win ratio is 55.78% excluding scratches. My winners are 43% larger than my losers on average. I am in my winners 2.68:1 longer than my losers. My average risk per trade is 1.02% of the account size for a given month. The max risk I took on a trade was 1.65% of the account size. Nothing crazy risk wise. I always have a hard stop in the machine -always…and I never ever cancel it. For the 4 months August through November (2011), I have an average gain of 2.32% of the account total for that month. (6.7% the best/August -3.3% worst/September)

There are a few things that can be extracted from this:

  1. This trader has been going at it for several years and only now is finding his feet as a profitable trader. This is very common because the majority of folks who start trading really have no idea where they are going or what they need to do to get there. Figuring that out (usually through trial and error) often takes literally years.
  2. The trader had spells of profits, but was generally losing until the last few months. This is the standard pattern because consistency is lacking and developing traders often don’t know why they are struggling. And even when they figure it out, they still have to consistently implement the required change to get things sorted out.
  3. The trader understands the value of keeping track of his performance statistics, which too few traders do. The step he’s lacking here is the objective benchmark against which to measure his performance – at least so far as he’s communicated.

What this person is looking for from evaluators is whether he’s making enough from the markets – and also whether his performance has reached a level of predictability to suggest that it’s OK to add money to his account (that’s a separate part of the email). The numbers certainly look good. The problem is, though. we don’t have any way to tell him whether his results are good in the context of his trading method/system and repeatable or not.

Just as a start, we don’t know whether he’s trading a consistent system or multiple different ones. We also don’t know whether he’s being consistent in the application of his system or methodology. An additional question is why he’s only traded 70 days during the period in question. What’s the cause for not trading on the other days and does that have an implications for his performance?

I can also think of these other questions:

  • Do you ever have multiple positions on at a time?
  • If you’re risking about 1% per trade, why are only only making about 2.3%/mo given the number of trades done per month?
  • How much time is being put into the trading?
  • Given the numbers provided, the trade expectancy is about 0.355%. How does that compare to prior performance of the system/method employed, or to how the system should have been employed over the time period in question?
  • Can the system/method be used in a more frequent fashion to produce higher returns?

There’s a lot that has to go into actually judge trading performance. Just looking at the return figures isn’t going to be enough in a case like this. The best approach for any trader in this kind of condition is to try to figure out how they could/should have traded their system or methodology over the period in question and compare that to how they actually did. If the two are a close match, then you’re at least doing that part of it right. It then becomes a question of whether the system’s performance can be sustained and scaled up.

By John

Author of The Essentials of Trading

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