The words "performance review" may trigger anxiety for some people; however, reviewing past trading is essential to making progress and improving performance. Taking the time to reflect upon what trade strategies are and aren't working can give you a more realistic picture of your trading behavior and can help you evaluate your trading style for areas of strength and areas that need improvement.
When to review performance
So when and how frequently should you take this kind of inventory? That depends on your trading style and trading frequency. If you make fewer than five trades per month, a monthly or quarterly review may be sufficient. If you are trading every day, a weekly or monthly review may be more appropriate.
Use good judgment in determining how frequently to review your performance. Reviewing performance after every trade does not offer much perspective on how well the trade performed; however, if you wait too long, you may miss opportunities to make needed adjustments.
How to review performance
There are a number of ways to assess trading performance. Obviously, the most important one is your overall profit/loss. On a net basis, are you making or losing money? How is the market overall doing? And, how are you doing relative to the market?
Another important metric is the percentage of trades showing a profit versus the percentage of trades showing a loss. This is sometimes called a "winning percentage" or a "win/loss ratio." While we all want a high win/loss ratio, your winning percentage doesn't have to be 70% or more to be considered successful. Your overall results depend on another important set of numbers: your average win versus your average loss. If the average of your winning trades is more than the average of your losing trades, you could still be profitable.
Expectancy is the average amount that a trader expects to win or lose per trade. It combines your percentage of profitable trades and average gain from those trades with your percentage of losing trades and the average loss from those trades.
Expectancy = (Probability of profitable trades x average win) – (Probability of losing trades x average loss)
Let's assume that 40% of your trades are profitable and your average gain is $500. Let's also assume 60% of your trades are not profitable and the average loss is $250, resulting in an average gain of $50 per trade.
Traders often seek a high percentage of profitable trades. You should aim for a positive and higher expectancy on each trade.
The big ones
In addition to looking at the above calculations, it is worth looking at your largest winning trades and largest losing trades. Is there anything unique or repeatable about your big winners? What might you learn from your biggest losing trades? Was the position too big? Were brackets in place? Did you stay true to your plan? A big loss can wipe out several good trades, so learn whatever you can to make the next loss a smaller one. Simply minimizing your large losses can take you from a negative overall return to profitability.
When reviewing your trades, look to categorize them. If some of your trades are based on fundamental analysis and others are based on technical analysis, determine which group is performing better. You can also do this with other variables, including timeframe, strategies, and trading instruments (stocks, ETFs, etc.).
You can review trading performance to gain insight into the factors impacting your trades. Take the time to understand what is working well and what could be improved. Then, take action. What you can learn from this exercise cannot be overstated.