In order to determine if your trading system is as effective as possible, it is important to keep track of your trades and analyze the results about once a month. It is important that you don’t overanalyze your results as otherwise a handful of good (or bad) trades can throw the entire average off and cause you to move forward in a less than optimal manner.
The metrics that you are going to find to be the most helpful are going to vary based on your trading style. If you prefer high risk/high reward trades, then you are going to be more interested in total net profit while if you prefer to avoid as much risk as possible, then your successful trade percentage is going to be more useful. Regardless, it is vital that you review and thoroughly understand a wide variety of different performance metrics related to your plan or your system before determining if it is time to try something new.
Performance reports: A performance report for a strategy or trading plan is an overall measurement of how it performs at the top level. A good performance report will reflect on the rules you are trading by and compares the results to an overall historical context. Also known as backtesting, this is a useful process to perform either before you begin using a new plan or once you have already started if you feel that the way it has performed so far is a fluke. Most trading platforms can generate performance reports automatically both via back testing and in real time.
The first part of any performance report is the performance summary which outlines the most important metrics of the plan or system in question. It is common for these reports to include performance graphs, trade lists, and periodical returns. They keep track of every trade that you make, the time and date it occurred, the type of trade it was along with any profits or losses that resulted from it in the form of a percentage of the cost of the trade. Remember, keeping an eye on weekly data might not be especially helpful, though quarterly or monthly data will allow you to see the forest for the trees more easily.
This information is especially helpful when you want to know not just what your trading result totals are but why specific trades played out in a specific way. When studied properly they can easily allow you to see how individual flukes can be turned into patterns. They are also useful when it comes to ensuring that you don’t repeat disastrous mistakes a second time.
These details can be found in the performance graph displayed as either a bar graph that shows a monthly net profit or through what is known as an equity curve. This graph is an excellent way of gaining an overall idea of the quality of trades that are made over a given period of time without dealing with the noise inherent in the market as a whole.
Metrics to consider
Every performance report is going to include a wealth of data, much more than you are going to need in most cases. This can make getting started difficult if you don’t know where to look. Consider the following metrics first and then dig deeper if you still haven’t found what you are looking for.
Total net profit: The total net profit broadly determines the success or failure of a plan or system over a specific period. This number can be found by taking the total gross loss, adding it to the commission costs, and then subtracting from the total amount made from successful trades. While it is good to know if you are turning a profit, the total net profit can be deceptive as well because it won’t show how often your plan or system was successful, just the overall results.
Profit factor: In order to find the profit factor of your plan or system you will want to start with the total gross profits and then divide by the total gross losses with any relevant fees added in. If the result is greater than one, then you can consider your current strategy a success. This number equates to how many units of profit you can expect for every one unit of risk you undertake. The higher the number, the greater the difference between your wins and your losses.
Profitable percentage: Also known as the probability of winning, your profitable percentage can be found by taking the number of trades that you have made successfully and dividing it by the total number of trades that you have made overall. Unlike with profit factor, there is no right answer to this amount as it is going to vary based on personal trading style. If you prefer higher risk trades, then a smaller number is acceptable. If you prefer more reliable trades, then you want the number to be as high as possible.
Trade average net profit: The trade average net profit can be thought of as how reliable your system is overall, expressed in the amount of money that typically changed hands with each trade. To find this amount all you need to do is to divide the total profit you have made by the total number of trades. If the resulting number is negative, then you know your plan needs work. When figuring out the trade average net profit, you will want to leave out any exceptionally good or bad trades as they can easily skew the results.