Sunday, December 20, 2009

How Do You Make Your Money as a Trader?

One worthwhile exercise that I recommend to traders is to track monthly returns across 2009. This is because 2009 has featured a range of trading environments, from trending to non-trending, and from highly volatile to less volatile.

If you are a trader that exploits momentum and trending, you probably perform best in a volatile trading environment. On average, you probably did better in 2008 than 2009, and you probably did better in early 2009 than later in the year.

If you are a countertrend trader, your results may be exactly opposite. 2008 might have been a difficult year, and 2009 might have been better for you as the year progressed.

Either way, the look at the monthly returns can help you identify the market conditions that are most favorable to your trading and those that are most challenging. That information can be invaluable to proactively taking risk when the trading environment is good and pulling in your horns when returns are likely to be more limited.

Looking at your trading results week to week and month to month also can show you how lumpy your returns have been. Traders can swing quite a bit between periods of profitability and periods of drawdown. Some of those swings are attributable to market conditions, but many of them also reflect the psychological variables that affect performance: confidence/lack of confidence and focus/distraction. A look at the consistency--or lack of consistency--in your returns can be an excellent window on your psychological strengths and vulnerabilities.

The end of a year is a great time for review, assessment, and goal-setting. Knowing how you performed is crucial to establishing how you'd like to improve in the year ahead.