Thursday, May 01, 2008

The Importance of Keeping Score

How much do you know about your trading?

* Take the absolute value of your daily gains and losses and divide them by your total portfolio value. How much of your portfolio are you putting at risk each day on average? 1%? 3%? 50 basis points? How has this changed over time? How does this change when you're making money? Losing money?

* Take a look at the 10% of your largest trades (i.e., when you've taken the largest positions). Have those tended to be winning trades or losers? Do you have a greater edge when you're more aggressive or less?

* Take a look at your trading results as a function of day of week and as a function of time of day. Do you trade better at certain times than others? Take a look at how you start a day, week, or month: does this affect how you trade subsequently, and does that affect your overall profitability?

* Take a look at how long you hold winning trades vs. losing trades. Do you get out of winners quicker than losers? Do you have a small number of large losing trades that you hold well beyond your average holding time per position?

* Take a look at your trading results after a down day or a down week. Does being down affect your trading? Do you trade better or worse when you've lost money the day or week before? How about trading results after an up day or week? Do you trade better or worse when you've been making money?

As I emphasized in my performance book, all of these are metrics that you can keep in a trading journal to track what you're doing right in your trading and what needs improvement. Most traders don't have an objective picture of how well or poorly they're doing, because they don't track the drivers of their success or failure.

In my recent post, I mentioned two very nice resources for tracking your performance. Another tool you might want to consider to track your performance is the Trade Performance program developed by Steve Geringer. In addition to helping traders track their performance as a function of date ranges, security types, symbols, etc., Trade Performance doubles as a tool for journaling, trade planning, risk management, and business planning.

Steve is making a "lite" version of Trade Performance available to traders free of charge. This version contains much of the functionality of the standard version, with the exception of tax reporting and automatic importing of trade data. Screenshots of the program might help you figure out if the program would be helpful for you.

I work with quite a few professional traders. One thing that distinguishes them as professionals is that they keep score religiously. They know how much risk they're taking, how well they're performing, and whether their trading is better or worse than usual. That helps them make rapid course corrections, pull back their risk, and keep overall losses modest. If you don't work for a firm that keeps score for you, dedicated tools are worth looking into.

Some tools for tracking metrics, in addition to Trade Performance, include:

If you know of others and can recommend them, please add to this list with comments to this post. Thanks!


Trader Psychometrics