June 12, 2008 at 7:25 am | | Comments 5

Evaluating Trading Performance

A trader recently asked me how I evaluate my performance as a trader, and while to many the answer might seem obvious, in reality there’s certainly more than one answer.

That’s because there are numerous ways to evaluate our performance as traders, but let’s look at 2 general categories for the purpose of this post.

The most common way to evaluate performance is based purely on the results…P&L, win rate, max gain vs. max loss, drawdown depth from account highs, etc. That’s the quick conclusion most people jump to, and those statistics are definitely important, particularly to those who simply want to know the bottom line.

The only problem with the data is that it only tells part of the story. Many traders know the bottom line, but they aren’t sure where to get answers pertaining to how to improve it.

Getting across that bridge requires another strategy.

Another way to evaluate our performance as traders is to closely examine our trading process. Doing this in an honest and objective manner can reveal some very useful information when it comes to modifying our trading plan moving forward.

In order to accomplish this though, we have to ask ourselves some difficult questions in search for the truth, some of which might be:

Did I have a specific plan for that trade and follow it?
Am I taking plays which I understand and which are suitable to my trading timeframe?
Am I trading too large, and as a result making poor decisions as I respond only to my P&L?
Am I preparing myself for the trading day by doing my homework?
Am I trading responsibly?
Do I have some reliable strategies which can produce a profit over time?

I think the deciding factor between these two main evaluations is the difference between data and our mindset. Sometimes we trade with the proper attitude and emotions, yet our data needs fixing. Sometimes our data is a little off, but what really needs fixing is our attitude or our mental approach (overtrading, revenge-trading, carelessness, fear, etc.). Taking notice of the symptoms will help us know which way to turn.

Personally, I used to evaluate my data at the end of every month, but now that I’ve been at this for a while, my frequency and evaluation style will vary as needed. When things are going well, I really don’t evaluate much at all, I just try to keep doing what is working.

When I get in a slump, I’ll first look at my routine to be sure that’s in order. Then I’ll turn to my win rate and determine if something is causing that to falter (like certain chart patterns not working, for example). If I’m still seeking a solution, I’ll then see if my max gain vs. max loss during that period is out of whack, or if my average gain vs. average loss size comparison needs to change.

As I go through this process, total honesty with myself is required or else I’m simply wasting time. And as I see certain things begin to stand out, I’ll impose some restrictions or new rules on myself in order to first stop the bleeding, and then hopefully right the ship.

So the next time you get to thinking about how your trading is going, be sure to look at some different angles than purely your P&L. While that may be the bottom line that you’re striving to improve, examining some other areas of your trading process can shed some very helpful light on how you can go about growing your trading account.

Trade well today!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service