Analyzing your own trading performance is a crucial part of becoming a successful Forex trader.
The metrics used to quantify your performance are relatively straightforward and using them to express results should help you appraise your performance with greater objectivity. They also offer the opportunity for your strategy to be improved; you wouldn’t be the first trader to have studied the hard facts relating to performance reports and benefited from learning that something that they thought was the case, actually isn’t.
It’s worth highlighting that measuring your performance is important during the testing stage, prior to live trading, and also once live trading has begun. For one thing, lessons can continue to be learnt post-trade. In addition, it’s likely that differences may exist between pre-trade and post-trade environments that only show themselves once live trading has begun. This of course means that when moving from Demo account trading to ‘Live Trading’ you must ensure you allocate the minimum capital possible.
Some of the most useful metrics are detailed below. They offer their own form of insight and part of the skill of the trader is to learn how and when to apply them. Note that they are often best used in conjunction with each other:
Number of Winning trades / Number of trades
Number of Loss making trades / Number of trades
Useful but basic, it does not account for the cash amounts associated with winning and losing but is useful if it acts as a reminder that if cash amounts are indeed equal then a trader that wins 51 times out of 100 will be successful.
You should also be able to establish that adjusting the time period of the study can influence the returns. A strategy that has stellar performance on one day may be loss making over a longer time period.
Total profit on Winning trades / Number of winning trades
Total Losses on Losing trades / Number of losing trades
This develops understanding by bringing in cash values.
It keeps honest those strategies that record small profits on wins but substantial losses when they do occasionally occur.
Take Profit Ratio (TPR)
Average $ Win / Average $ Loss
Total $ profit / Total $ loss
>1 = a profitable strategy
Expectancy = (Win rate x AverageWin) / (Loss rate x AverageLoss)
>1 = a profitable strategy, should the number of trades you put on bring about ‘normal distribution’.
These metrics can help you develop, test and appraise a trading strategy. Moving on from the testing phase it is important to combine your strategy into a trading plan. This will include consideration of risk and money management rules, and for example, whether certain times of the trading day show optimal returns. The plan, which will involve aspects of trading discipline, should be treated as of equal importance to the strategy itself.