Tuesday, March 10, 2015

Best Practices in Trading: Conducting Structured Performance Reviews

It's easy to become so caught up in trading that we fail to review--and learn from--our trading performance.  The successful money managers I've worked with have had structured processes for previewing markets, viewing markets during trading hours, and reviewing trading once the day and week are finished.  Previewing brings preparation and rigor to trading; reviewing allows us to stand back from our decisions and take a coaching perspective.

Today's best practice is structured performance review from Ryan Worch, principal at Worch Capital.  He explains:

"I always want to be confident that I'm operating with an appreciation for the larger picture.  It's easy to get bogged down in the day-to-day action so I make a point to create a series of monthly goals and observations.

At the end of each month, I perform a post-analysis on all of my trades.  This is where the real work is done.  I assess every trade and figure out what worked and why it worked.  By doing so, I'm hoping to see what is being rewarded in each environment.  From this, I can set goals for the next month.  Sometimes breakouts are working, or mean reversion, or pullback trades.  The only way to determine this is by breaking down every trade at the end of each month.  This process loop and feedback is critical to staying engaged and adapting to ever changing markets.

I'm challenging myself and asking questions during this process.  What characteristics did the winners have?  What did the losers have?  Is there a pattern to be recognized?  I record all of this for future reference.  This is a feedback loop that makes me a better trader and helps me break down information more quickly in future markets and trades.

Some quantitative examples are:  % winners vs. losers; average win vs. loss; % of equity risked; % of equity gained/lost; % gain/loss on each trade, etc.

From a qualitative standpoint:  What caused the position to move (surprise, upgrade, downgrade)?  What was the surrounding market environment like?  Were outside forces at play (geopolitical event, monetary policy event, etc.)?"

Note that Ryan is reviewing both the market environment and his specific trades.  By seeing which trades are and aren't working, he gains insight into the market that can be fed forward into future trading.  That insight can also help him take more risk in favorable environments and pull back his risk taking in murky ones.  Knowing why your trades have worked can provide useful clues as to what could work going forward.

Further Reading:  Using Trading Metrics to Understand Your Trading Psychology