This past week has been a somewhat mixed bag. I finally broke the $20,000 mark in my IRA trading account, which puts me just about $5K shy of the pattern day trader limit needed to regularly trade intraday from that account.
As for my main account, I’ve come out in the green five days in a row, which is obviously great. But I’ve also given up a chunk of those profits to hasty buying, technical difficulties, and just plain bad luck.
How do I know this for sure? Because I’m always asking myself several questions. How frequently do my trades turn a profit? What was my success rate this week? Do I know the average volume of your profitable trades?
Newer or more casual traders might not find themselves looking beyond their P/L as a gauge of how well their strategy is holding up, but I believe that all traders should ask questions like these as a matter of form.
One of the simplest and most intuitive measures of how well you’re trading is to calculate your accuracy, which means taking your profitable trades over the total amount of trades you took. While this sounds simple, it’s one of my favorite monthly reference points. It lets me put a hard figure on how well my current strategy is doing. Depending on the time frame you use, this measure of accuracy can be tailored to reflect longer trends in your trading and in the market’s behavior.
Beyond hit percentages, traders tend to latch on to different averages depending on what they view as valuable. I enjoy refining my trading system and understanding my risk/reward, so I often take a look at my expectancy ratio, which calculates the returns I’ve gotten, or can expect to achieve, with a particular strategy over an extended period. To do this, take your profit/loss ratio and multiply it by your success ratio in those trades (say 60 percent, or .60), then simply subtract your loss percentage (.40, in this case). This will give you a figure that shows what your average return multiple looks like in your current strategy.
There are hundreds of other ways to quantify success in the market. Of course, any measure of accuracy should come with a record or log of your planning and activity so you can change, adapt and grow as a trader. Keep that in mind as you plug your trading stats into your preferred formulas for success.
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