Stats to keep an eye on..
Why do you need to keep track of the stats?
Forget about trading for a second. Consider any performance-based profession, let us say, any sport. By now you might have already known that you must be in the top 5% of the participants(in terms of the skill) to ensure your survival. In a realistic way, do you think that it’s possible for an aspiring person to reach that top 5% in the first few days of starting his learning? Without any doubt, the answer is a big no. I’m not talking about the one that trains like hell before appearing for an Olympic event and wins the gold medal in his first attempt. I’m talking about the person who is taking the first step of his journey in a particular sport. I hope I made myself clear so far.
So far so good. Being a fan of cricket, whenever I hear the name “Sachin Tendulkar”, what comes to my mind is his stats. The number of centuries he scored, his strike rate, his average score per match and stuff like that (of course along with the sexy cover drive he hits 😉 ). Roger Federer, the number of grand slams he won. Michael Jordan, Usain Bolt, Tiger Woods, Michael Phelps, whoever it is, stats are the metric to measure the performance in any performance-based profession. Trading also belongs to that category.
If you ignore them, there is no way you can improve during the learning curve as the flaws of your performance are hid by your opinions.
If you ignore them, there is no way you can maintain the consistency in profits once your edge starts giving good trades.
What the hell are those stats? We will look into them a bit later in this article.
What do you need to measure your stats?
A decent sample of trades you have taken. It’s not 10 trades. It’s not 20 trades. Because the average number of trade you take totally depends on the time frame you trade and the type of trading you do (swing/positional/scalping). As the main intention of deriving the stats is to look into your performance, it makes sense to consider your performance in different market conditions. For the sake of generalization, for a day trader, consider all the trades you have taken in the last 20 sessions, ie. roughly a month. I repeat, all the trades. You are not allowed to ignore a single trade even if that is an emotional trade.
I recommend you to use a spreadsheet to log those trades. I personally use a Trading Journal Spreadsheet.
I’m not marketing that TJS document here and I will not get a single penny from them.
If you can’t afford it, you can use a normal spreadsheet as the calculations are very simple.
What stats to track?
We need to track the following
To calculate these, you need the following inputs
A total number of trades in the whole sample of trades.
The number of winning trades in the whole sample of trades.
The number of losing trades in the whole sample of trades.
Sum of the profits from all the profitable trades.
Sum of the losses from all the losing trades.
Win % = (Total number of winning trades) / (Total number of losing trades).
Average Win = (Sum of the profits from all the profitable trades) / (Total number of winning trades)
Average Loss = (Sum of losses from all the losing trades) / (Total number of losing trades)
Expectancy = (Win % ) x (Avg. Win /Avg. Loss)
Let’s look at an example. Let us say,
Number of trades = 100
Number of winners = 60
Number of losers =40
Sum of profits from profitable trades = $6000
Sum of losses from losing trades = $1000.
Win % = 0.6 or 60%
Average win = $100
Average Loss =$25
Expectancy = 0.6 x (100/25)
= 2.4 Good strategy.
Let’s look at another example.
Number of trades = 100
Number of winners = 40
Number of losers =60
Sum of profits from profitable trades = $1000
Sum of losses from losing trades = $6000
Win % = 0.4 or 40 %
Average win = $25
Average Loss = $100
Expectancy = 0.4 x 25/100
= 0.1. This sucks..
So it all comes down to this,
If the expectancy is greater than 1, your strategy ensures long term survival if proper money management rules are followed.
If the expectancy is less than 1, no matter how good your money management rules are, you will blow the account.
Please make sure that you consider all the trades from the last 20 sessions while calculating the stats.
Apart from solely looking at the expectancy number, combining the other stats will give you an idea about the flaws in your trading. Let’s look at a few combinations of stats to find the root cause of poor performance.
If the win% is high and the average win/average loss is less than one, work on your money management rules. You are not considering risk/reward and the maximum risk per trade into the evaluation of the trade before placing the entry order.
If the win% is low and the average win/average loss is greater than one, you are taking a lot of bad trades. Ask yourself these questions, ” Is lack of patience or the anxiety to be in a trade causing this issue? Or I need to optimize my trading edge? “
If the win % is low and the average win/ average loss is less than one. Sorry mate, you are prey to the professionals. Stop trading with real money. Work on your whole edge. In fact, ask yourself this question, “Do I really have an edge? Does everything I believe is in tune with the dynamics of the market? “
End of the day, the strategy with an expectancy greater than 1 with a decent balance between win % and avg. win/avg. Loss, which are derived from at least 20 sessions trades is proof that you have an edge in the markets. A big 100 tick winner or a stream of winning trades once in a while is never a metric for your edge.
I assume that you know something about markets to make your hands dirty by now. Your next job is, prepare a spreadsheet, feed the formulae, log the trades every single day, track the stats, find the flaws, work on the leaks and face the next session with improved performance. There is no short cut. Don’t worry about profits. You take care of the stats and the stats will take care of the profits.