Much has been said about the importance of keeping a trading journal. Despite this, it seems that traders still underestimate the value of evaluation of their own performance. Let’s focus on the most essential metrics you should think well through.
Contents
Win Percentage
Win Percentage is an easy to understand concept. It reveals how many of all our transactions were the winning ones.
To estimate what is your Win Percentage you must divide the number of winning trades by the number of all transactions taken by you.
Win Percentage = Winning Trades / Total Trades
For instance, if you have opened 150 trading positions and 84 ended with profit, your Win Percentage will be 56%.
84/150 = 56%
Win Percentage cannot be considered alone when it comes to assessing the profitability of your trading system. You may gain a high Win Percentage but you also have to think about the average size of your winning and losing trades. For instance, your trading system may be profitable despite a low Win Percentage if your average winning trade is much larger than the average losing trade. On the other hand, when your average winning trade is much smaller than the average losing trade, your system may not be profitable even with a high Win Percentage.
Win Percentage is an important metric to include in your evaluation but never as a stand-alone number.
Expectancy
This metric combines the average win percentage with the average win and average loss size.
(Winning Percentage x Average Win Size) – (Losing Percentage x Average Loss Size) = Expectancy
Let’s say someone’s system has a Winning Percentage at the level of 56%, an Average Win Size at 500 and an Average Loss Size at 400. Its Expectancy will be calculated as follows:
(.56 x 500) – (.44 x 400) = 280 – 176 = 104
Expectancy says what is the expected profit per trade. Expectancy of $104 indicates that on average, such a system should gain around $104 per trade. This is a positive expectancy.
Now, consider the following example. A trader’s system has a Winning Percentage of 35%, an Average Win Size of 450 and an Average Loss Size of 400.
(.35 x 450) – (.65 x 400) = 157,5 – 260 = – 102,5
This is an example of a negative expectancy. It suggests that such a system is, on average, anticipated to lose $102,5 per trade.
Largest Losing Trade
The largest Losing Trade is simply the amount of the biggest loss generated by your strategy. This metric should be kept low so that your balance account remains safe. It is crucial to understand this metric in the sense of the reason behind it. And here writing a trading journal comes in handy. It gives you an opportunity to revise your past performance and analyse the circumstances of the largest loss that happened. Ask yourself whether it was caused by some external or internal factors. Was it something you have control over? What will you do if it occurs in the future?
Maximum Drawdown
Maximum DrawdownMaximum Drawdown is the largest decline from one peak to the trough before another peak is created. You cannot calculate Maximum Drawdown before a new peak arises.
Imagine that a trader has $10,000 in the account. With time, it rises to $12,000 and then it falls to $8,000. Next, it rises to $9,000 just to fall to $7,000. Finally, it reaches $15,000. What was the Maximum Drawdown in the above example?
The lowest low before a new peak occurred was at $7,000. The highest peak prior to a new peak was at $12,000. The Maximum Drawdown was 58%.
7,000 / 12,000 = 58%
Profit Factor
Profit FactorThe last metric I will describe here evaluates the profitability of the trading system by comparing the total winning and total losing amounts.
Gross Winning Total / Gross Losing Total = Profit Factor
Let’s see it as an example.
During one year, a trader has generated $26,000 in profits and he lost $15,500 in the trades. The profit factor will be 1.68.
26,000 / 15,500 = 1.68
The larger the Profit Factor, the more profitable system. A trading system is considered unprofitable if the profit factor remains below 1, moderately profitable if the profit factor ranks between 1.10 and 1.40 and quite good if the profit factor is between 1.41 and 2.00. The best systems reach the profit factor above 2.01.
Summary
Trading is risky. But it can be profitable. You just have to develop a good trading system. To do that, you should keep track of your doings and evaluate your performance regularly. This article has raised the issue of 5 trading metrics that are truly important in building a reliable trading strategy.
As you can see, trading is not something you can do sporadically. If you are serious about trading you should be ready to invest your time in it. Not only to learn about the platform and the financial instruments but also to collect data about your past activity in order to improve your performance in the future.
Wish you high earnings!