Trading system performance metrics

Instead, you can just focus on analyzing the reports and find areas in which you can improve easily. Let look at how most traders start their trading career. And note that includes me! I made the following mistake for years until I started using trading metrics to analyze my trading strategy. Most traders start out with a trading strategy they found somewhere and which looks very promising. They start trading the strategy for a while and might even have some initial success with it. The initial success is quickly forgotten and they traders start thinking about ways to avoid those losers they experienced.

Some just start randomly changing the strategy in some form or shape hoping this will avoid the losers. This strategy hopping is what most traders do. What traders should realize is that losers are part of life and part of trading. No matter which strategy you use, there will be a period where you are going to experience a losing streak. That is why you cannot judge a strategy based on only a handful of trades. So how to gain confidence in your trading strategy? By manual backtesting your strategy and gathering the trade metrics for at least trades and preferably 6 months of historical data.

This will cost you nothing except some time and effort but it will give you invaluable information and the confidence that your strategy works. They will tell you what you how many losers in a row you can expect and what your average or max. Having these numbers will make a big difference in your trading. This is probably the biggest reason why you should use trading metrics. To get the confidence that your strategy works and to be able to stick with it when you encounter the inevitable losing streak.

But when you are a profitable trader the trading metrics will give you valuable information where and how you could improve your trading performance. Note that now you are making small changes based on statistics.

What are the Trading Metrics?

Not on fear or intuition like losing traders are doing. This will verify if the changes you made actually improved your trading performance or not. Now that we have a clear understanding of what trading metrics are and why you would want to use them, let's look at the top 17 metrics. It goes without saying that traders are always searching for ways to increase their net profit. However net profit is probably not the best metric to use since it does not say anything about time and volume. By just looking at the net profit you might say that trader 2 is doing better.

However, if we include the time it took to make this profit then clearly trader 1 is the winner here. The profit factor measures the amount of money made against the money lost while trading. It measures whether the overall outcome of trades is profitable. It is normal to incur losses in the course of trading as well as make profits. The way to measure the profit factor is to divide the total winnings against the sum of all the losses.

The profit factor will tell you the real results of your efforts when trading. The ideal profit factor should be more than one. Anything below one is considered as a poor performance. There is a grading system for the profit factor to help traders know the performance of their trades. It can be easy to assume your trades are doing well when you rake in immense profits from one trade and multiple losses from other trades.

A factor of 1. The range of 1. Any profit factor that is 2.

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The profit factor is a good indicator of when a trader needs to change or improve their trading strategy. It is simple to calculate, and you can do it regularly to see your daily performance.

You can analyze trades that that has a high-profit factor. You will be able to identify the trades that had a lot of profit and try to replicate it. The same is true for the losers. The win ratio is an essential metric. The ratio represents the ratio of winners vs losers. Calculating the win ratio takes the number of profitable trades divided by the total number of trades.

While it might sound logical that you can only make money if you have more winners then losers this is actually not true.

If your winners are making much more money than your losers then you can still make money with a relatively low win ratio. Your win ratio should then be at least The average winner shows you the average amount that you win per winning trade. The average winner is calculated by dividing the total amount of profit made by all winning trades by the number of winning trades. The average winner and average loser metrics are used to calculate the expected value and expectancy. Besides they give us an indication of how much an impact a loser might have. For example, if your average loser is 3x your average winner then that means that a single loser will wipe out the profits of 3 winners.

That again would require that your win rate is high enough and that you have 3x more winners than losers. This could be perfectly fine if you use a scalping based strategy but would be horrible for a swing strategy. The average loser shows you the average amount that you lose per losing trade.

You can determine the average loser by dividing the sum amount of all the losses by the number of losing trades. Again the average loser and average winner will tell us how much impact a single loser might have and both are used in the calculation or the expectancy and expected value. In general, we want the average loser to be as low as possible and the average win as high as possible.

Note though that exceptions exists e. The holding time is the average time you are in a trade. This might be less relevant if you are a day trader and your trades only last a few minutes. But if you are a swing trader which has trades which can take weeks or months then the holding time becomes an important factor. When your capital is locked in a trade, then you cannot use that capital for other trades that might come along. That way it limits the number of trades you can take simultaneously.

The market often reacts violently when important news, or earning reports get released or disasters happen. When you are in a trade during these events your trade might go against you and stop you out. That is why many traders won't open new trades just before or during important news events. But note you cannot always predict these events. Some disasters might happen, trump might suddenly tweet to boycott china or a new war may be started in the middle east. All unforeseen events which could impact your trade. The expected value shows you the average amount you might earn or lose on a trade.