How to evaluate your trading

The main reason of this post is that you should be aware of whether you are trading "good" or not? Because when you are aware of that then there are much better chances that couple of losses won't effect your overall result and your winning "ratio" is much more than you winning "percentage". Let's emphasis more on that topic !

Evaluating your trading

Question that every trader asks himself from time to time can sound like this – «Is my trading good»? In other words, is it robust, does it have the edge, will it be profitable in a long run?

Some beginner traders say – «it’s very simple, if you earn money, your trading is good, if you lose money, your trading is bad». But it’s not that easy in a world of real trading – good trading does not necessarily correlate with short-term profits, bad trading does not bring profits in short-term perspective.

We never know whether this trading is good or not if we don’t know whether these series of profits was a result of following trading plan or veering from it? So, here we come to basic principle of trading – short-term results don’t matter too much, they can be result of luck.

Think about it – best trading systems are not providing profit all the time, worst trading systems are not providing losses always.

Ok, but what if you don’t have rigid trading rules for entering and exiting positions? It’s reality for discretionary traders who use their judgement for making trading decisions.

Is it really impossible to evaluate your trading using your profits/losses distribution?

To answer this question, let’s divide trading styles on 2 parts: 1.

Trend-following trading approach:

In this trading approach, trader expects to have small frequency of winning trades, but his profits are much greater than average loss. For example, it’s ok for trader to have 6-7 or more consecutive losses, then to cover it with 2 trades. His equity curve will look like shown below:

You see, that in this case trader has relatively small number of winning trades (maybe less than 30%), but he successfully covers his losses with 1-2 «home runs» (big swings). You see, in this trading style it’s not recommended to evaluate trading by short-term profit and we need more time to make conclusion – is this trading approach robust or not. 2.

Short-term trading:

By short-term trading, I assume that one can either day trade or hold position overnight but still have small duration of average trade (1-2 days). Of course, the less duration of trade we have, the less is our average profit per trade. Yet In this example, we can expect to have better frequency of winning trades. And correlation between good trading and immediate results is much better for short-term trading rather than for trend-following trading or other long term trading styles.

Equity curve in this case will look like this:

You see, here we can have about 50/50 distribution – in every second trade we can get profit or at least achieve breakeven point. Why not 70/30 or 80/20? That’s a dream of every trader – to have 80% of winning trades and also keep profit/loss ratio more than 2/1 (having average profit greater than average loss).

But there are no hidden hacks and shortcuts in trading – if we improve our frequency (quantity of winning trades), we lose magnitude (size of our profit becomes smaller). Some traders are proud that they have almost no losses or 95% of winning trades, but size of their possible loss can destroy entire account.

Market is hardly predictable in short-term perspective. I personally don’t think that we should chase for high frequency of winning trades. If I will be able to get 50% of winning trades and keep 3/1 profit/loss ratio, I would be in hog heaven.

In short-term trading approach it's much easier to evaluate your trading by short-term results - the better you trade, the more winning trades you will have and vice -a-versa. That's why personally, I prefer short-term trading approach, because I can keep myself on track and quickly recognize that my trading has become defensive, too aggressive e t.c.

Starting from September 2013, my own track record of results is shown below (Every week I put down result in pips in special Excel file):

You see, my profitable weeks are almost equal to losing ones - I don't have "home runs" except one trade on XAGUSD (Silver). But frequency of winning weeks (I had 2 times greater number of winning vs losing weeks) allows me to survive in the long run (and to get profit) without "killing trades". And, what is even more valuable,

I can quickly recognize when I'm trading poorly and correct my trading behavior.