When you think of process improvements that have revolutionized the retail industry (inventory management, for example); transportation (delivery systems for package carriers); and manufacturing, all have begun with rigorous measurement. Once you begin to measure outcomes, you build an objective foundation from which you can observe improvements and shortcomings.
Many interesting questions follow from the simple act of keeping score with your profits and losses:
* Under what market conditions do I tend to make money? Lose money?
* Do I tend to make money or lose money trading with longer or shorter holding times?
* Do I tend to make money when I'm taking more risk or less risk?
* Do I tend to make money or give it back after a winning streak? A losing streak?
* Which markets or types of trades tend to make and lose me money?
Each of these questions can lead to very useful improvements in trading processes. But none are possible without measuring your results.
Check out this valuable post from Abnormal Returns on performance measurement. Tadas emphasizes the importance of comparing your results to an appropriate benchmark. For instance, if you are seeking superior risk-adjusted returns, your relevant metrics will be different than if you are simply trying to beat the market averages. It's important to keep score, but it's particularly important to track the right scores.
Further Reading: Greatness in Life and Trading
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