6 smarter ways to measure trading success

“Everyone at school has a better mobile phone that I do …. They all get more pocket money …. And if I don’t get Beats headphones for Christmas, my life won’t be worth living …”

That’s how my 11-year-old measures himself against his contemporaries.

My brother and sister-in-law are off to the Maldives for a luxury 5-star Christmas break.

My wife’s ex-boyfriend has a better bike that I do, and can cycle further and faster.

I’m not sure we ever grow out of comparing ourselves to other people, and holding up unreliable measuring sticks of our success.

It’s easy to gauge our success, our performance and our state of mind all wrong if we’re using the wrong measures.

Traders very often judge their trading success on the profits sitting in their accounts at the end of the month. But there’s so much more to measure … and to be happy about …

6 smarter ways to measure trading success

Don’t get me wrong – successful trading has to be about making a profit … but the P&L figure for the end of the week … month … or year … doesn’t really tell you anything about what your long-term trading success is.

There are some far better yardsticks we can use – these’ll tell you whether your trading is on the right lines … whether it’s improving … and where your weaknesses are.

If you’re using the Trader’s Bulletin trade journal, then it’s simple to keep track of these figures. If you’re not, then it can be downloaded HERE.

1. Number of winning vs losing trades

There’s a general view that you’ll want to win more often than you lose – you’ll often hear traders tell you that ‘you only need to be right 50% of the time!’ – as if you’re betting on the toss of a coin. It’s actually quite hard to be right about trades 50% of the time – there’s a lot that can go wrong, and ways that you can be ‘right’ and still lose money through poor trade management.

There are many successful traders out there who’ll take lots of small losses and fewer bigger winners. What matters is how this figure balances with your average win/loss size (see number 2 below).

2. Average win size vs average loss size

I often bang on about how the 2:1 risk-reward principle should be viewed as an ‘aim’ rather than a ‘rule’.

Achieving double the reward on winners than the loss on losers is a tough call for any trading strategy to maintain – it’s certainly a lot harder than many trading gurus would have you believe.

However, if your losses are too big and keep wiping out all your gains –you’ve got a problem. This figure needs to be carefully balanced with your success rate (number 1, above) to achieve profitability.

3. Largest number of consecutive winners and losers

Take a look at when your winning streaks happen … and when losing streaks happen. What were the market conditions at the time?

This will give us a picture of which markets we’re good at trading, and which ones we should be wary of, or that our strategy just isn’t suited to. How can we protect ourselves against the poor market conditions, and maximize the benefits of the good conditions?

4. Worst draw-down periods

This would be the greatest fall off from an profit peak to a low point – i.e. how much profit we’ve given back to the market. It’s a good way of measuring the risks we’re taking.

Being profitable with small draw-downs means that risk-adjusted returns were probably good. Being profitable with huge draw-downs is a warning flag – you could be running too big a risk to achieve those profits.

Heikin Ashi Mountain traders are very familiar with this balancing act – how lower returns tend to give a smoother profit curve than high returns. And how this is often a compromise worth making if you want to achieve long-term trading success.

5. Holding time

Do you know how long you hold a trade, on average?

Do you keep a total of how much you’re paying in overnight costs to your broker?

When you keep track of this data, you may be genuinely surprised. And it comes in really handy when you track exactly how long you hold your winners, vs your losers …

This is an interesting one, and will give some clear info about whether you’re holding on to trades for too long or not long enough.

Do the wins tend to come quickly, while the losers are dragged out? This tells us that we should be cutting losses faster. Or are my losses the trades we get out of fast? Perhaps we should be giving them a bit more time to come to fruition…

6. Has it been a pleasure of a pain?

Most of us turn to trading the markets because we’re looking for an income that frees us from the 9–5 grind, while giving us the time and the money to do the things we care about.

Some trading methods might give us a fantastic end of year profit … but what have they cost us? Have we been tied to our computer screens for hours on end? Have we endured stressful ups and downs?

What really measures the success of your trading at the end of each month?

By tracking all of these pieces of data, you can see where your trading performance is growing, and even if you’re going through a rough patch, you can see where things are going right … where they’re going wrong … and how to fix them.

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