Evaluating Your Trading PerformanceEvaluating your trading performance helps you fine-tune your trading strategy. The records maintained in your trading journal form the basis for your trading evaluation. From this, you can ascertain in a systematic and objective manner: * How profitable you have been
* Your win/loss ratio
* Your average percentage win
* Your average percentage loss
You will also have the information from which you can calculate your trade expectancy. This is something that should be done monthly. Market conditions change and your performance will vary. It is essential that you identify when things are going wrong and why. ANALYSING YOUR PROFITABILITY As a share trader, you are running a business and it is essential to know on a regular basis how profitable your business has been. In the first instance, you need to know how profitable you have been overall, both in dollar and percentage terms. By percentage terms, we mean net trading profits for the period under review divided by total trading capital at the start of the period. An example might be as follows:
Trading Profits for the month: $6,000
Trading Capital: $104,000
Net Return: 5.77% However, evaluating your performance on a profit basis is not enough. You must also assess how that profit was made. You need to know the following: | How did your performance compare with the market average? | If you are trading shares, you should compare your monthly return to ASX 200. | | What was your win/loss ratio? | Your win/loss ratio is the number of wins to number of losses over the trading period measured. If you have 20 trades in the month, and 12 of them are profitable, your win-loss ratio is 12:8 or 3:2. | | What was your average win? | Your average win is your profits on winning trades divided by the number of winning trades in the period being measured. If you make $8000 from 12 winning trades, your average win is $667. | | What was your average loss? | Your average loss is your losses on losing trades divided by the number of losing trades in the period being measured. If you lost $2000 from 8 losing trades, your average loss is $250. | | What was your profit factor? | Your profit factor is calculated by dividing your gross wins by your gross losses. In the example, it would be $8000/$2000, which is 4. This is an excellent result. | | What is your average win to average loss? | Your average win to average loss is the average wins for the period divided by the average losses. In the example, it is $667/$250 = 2.67. This is a more than satisfactory result. |
You need to compare these results with your past performance. We compare the monthly figures to analyse our performance and note the trends, being on the alert for any indications that our strategies might need revising. DID YOU FOLLOW YOUR TRADING PLAN? Your records will enable you to see how closely you followed your trading plan. This will reflect on your discipline, which is a key feature of successful trading. This, as with the rest of the evaluation, should be taken seriously. Every time you open a position, you are exposing yourself to risk. One of the reasons for having a trading plan is to minimise risk through carefully structuring a money management strategy suitable to you. If you are unable to control your risk, you will not trade to your full potential. If you do not review your ability to follow your plan, you will find it difficult to understand where you have weaknesses that need to be overcome. By identifying your deficiencies, you will be able to work on them and turn them into strengths. All this takes time. Trading is not easy. It requires effort and dedication. If you are not prepared to put in the effort, you cannot expect to reap the rewards. Detailed record-keeping is an essential part of the effort required. Your trading plan will be different from the plans of other traders. Your reasons for trading, your views and attitudes, your risk aversion and your psychological make-up will be unique. For this reason, you must prepare your own trading plan. Trading With A Plan, helps you to structure your unique trading approach by providing an easy-to-use template. Tony Compton and Eric Kendall
Authors of Trading With A Plan |
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