Measuring Your Trading Performance
Performance measurement is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component. Definitions of performance measurement tend to be predicated upon an assumption about why the performance is being measured,
The above being a dictionary definition lets speak down to the subject, trading performance is a method that is used to assess and evaluate how a trader is doing with the trades. Normally performances are monetized in terms of IRR the rate of return which is a partial approach to the subject, this article will capture the approach holistically.
Reason for performance evaluation
The main reason for assessing your performance is to try and seek consistence in your operation, develop a good trading plan and some risk management skills. Most trading platforms have a History you can retrieve a report by date of all the trades that you have took, their outcomes be it a loss or profit some even provide pictorials in form of graphs and pie charts.
Ways to measure performances
Average profit or loss per trade
A ratio of average profit per trade can be compared to average loss, if profit over weighs loss then you are doing so well , for instance if you are targeting to gain $100 per trade and hoping to lose only $10 on that trade then the average ratio becomes 10:1 (100/10)
Measurement in pips
Though it is always advised to measure risk in monetary terms some traders choose to go the pip way, this method evolves around pips you are willing lose or that risk per each trade that you take.
Risk reward Ratio
This method focuses on the risk to reward ratio, for every trade that you take normally the reward should be as twice as the risk that you are taking or even more, you can aim to get $20 by risking $10.
Percentage on Return
When using this method for evaluation its always a game of numbers, If you take on 10 trades then profit on 8 trades all it means is that your winning percentage will be 80%, that is the reason why when selecting trading strategies you must chose those strategies that have more than 50% winning percentages.
Gross vs Net return
A gross return is a total rate of return before considering expenses and other costs, a net rate of return shows the investment’s return after consideration of expenses, Normally your Net return will be gross less fees and commissions that you might have paid to your broker.
Sharpe Ratio method
A popular ratio of risk-adjusted returns. The higher the ratio, the higher the return a trader can expect in relation to the risk taken. Traders often aim to have a Sharpe ratio of 1 or higher, as a figure lower than that suggests that he/she is taking too much risk compared to the expected return
Risk only 2.5 %
This methodology is based on discipline whereby as a trader you set a percentage that you are willing to lose and you do not exceed it under whatever circumstances. The commonly used percentage by most expert traders and risk management specialist is 2,5% of the total account.
Drawdown is the difference between the initial deposit and the lowest point the trading account reached below the deposit level. If a trading account with an initial deposit of $10 000, a peak of $11 000 and a minimum value of $8 000, the absolute drawdown would be $2000 ($10 000-$8 000 = $2000). It will be the biggest lost and blow that you are willing to take.