How can you track your performance as a trader?
If you are also struggling with this question, this article might answer your queries.
A lot of traders only track their equity curve regularly to understand if it is going lower or higher. However, is this information enough?
How would you handle the situation when the curve is going down?
Answering that means finding more data related to your trading progress. Without appropriate data, it is not unlikely for a pattern day trader to run in circles and suffer a poor equity curve.
To help you track your trading progress, we have discussed some key performing indicators below. Read more to know how it works.
Table of Contents
What is Trading Performance?
The trading performance is a method to evaluate risk and return tolerance of a trader. It involves multiple methods, algorithms, and KPIs. While the numbers involved in trading performance evaluation may be difficult, it reveals valuable insights related to your trading progress. Hence, let’s see how you can measure your progress as a trader.
Key Performance Indicators To Check Trading Performance
To ensure that you are tracking your progress effectively, there are five metrics that you should know. Understanding and using these KPI correctly with your stock API will help you gain a market edge. So, without further ado, let’s see what these key performing indicators are.
The maximum drawdown is an important key performance indicator, which every trader should track on a regular basis. It indicates the amount you have lost in the most recent high before you reach another high.
Let’s understand this with an example:
If you had received a high of USD 1,000,000 recently, however, before the high exceeded from USD 1,000,000, it dropped to USD 950,000. This means that your maximum drawdown here is 5%, which is calculated by dividing both the high and pull back.
This KPI is, undoubtedly, one of the most important because it helps you understand your decreasing performance. In fact, if you look at it, then maximum drawdown is the difference between an average-performing and high-performing trader. The high-performing trader is able to reduce and almost minimize their drawdowns to a great extent.
R is another significant key performing indicator, which allows traders to understand their profitability. It is calculated by taking your winning trades (total) and dividing this number by the losing trades’ absolute value.
Simply put, if you calculate R ratio regularly, then you can get a fair idea of the amount you are making when compared to your losses, irrespective of the trades you have conducted. In every way, this KPI offers clarity to the trader, which helps in moving in the right direction accordingly.
One of the amazing features of the KPI R is that it helps you understand your wins.
Here’s an example for the same:
If you check the above example, then it clearly depicts that even if your loss percentage is 60%, your profit is much larger. This is because your winning amount is much more than the loss amount, which has helped you gain a profit even after the losses.
The profit factor is an essential and valuable KPI on this list. It is calculated based on consecutively close trades. In this metric, you need to divide the rate-of-return corresponding to each trade by trading capital (total). This is then plotted in the form of a graph for every closed trade.
Below is the formula of profit factor:
Cumulative ROR (Consecutive trades which were profitable)/Cumulative ROR (Consecutive trades which were unprofitable) = Absolute Value
It is suggested to maintain the profit factor graph of at least the last five years for better analysis. Other than this, you can plot this on your graph based on 12 months, five years, number of trades, or lifetime trades.
However, how can you know if your profit factor is good or bad?
|Above 3.5||Extremely beneficial|
Based on the above table, you can justify your profit factor. Overall, if it is above 1.5, then you don’t have to worry, as you are doing good. If it is below 1.5, then you should start worrying about your trading performance.
Gain to Pain Ratio
The gain-to-pain ratio, or commonly referred to as GtPR, is calculated based on monthly ROR. Hence, its formula is similar to the profit factor. However, the only difference is that your need to divide monthly RORs with the absolute value of all months.
Below is the formula of gain-to-pain ratio:
Cumulative monthly ROR (Consecutive trades which were profitable)/Cumulative monthly ROR (Consecutive trades which were unprofitable) Absolute Value
The GtPR value depicts exactly what it says in its name: the pain you need to suffer to gain profits.
Similar to the profit factor, you should maintain at least five years of GtPR data in your records to understand this key performance indicator better. However, you can understand irregular performance even with one year of regular data.
|Gain to Pain Ratio||Analysis|
|Above 3||Extremely beneficial|
If your GtPR is below 1, then it indicates poor performance or irregularity in performance. However, if it is above 1, then you may be moving in the right direction as far as your trading progress is concerned.
It is not necessary to understand too many trading performance indicators and worry about all of them. Choose 3-4 key performance indicators that can help you achieve maximum gain. Focus only on these KPIs for improved future success rate and performance.
Further, it is best to keep plotting your progress to have a graphical overview of your performance. It will help you motivate yourself and get a clear picture of the situation. These measures will help you give undivided attention to your progress and improve over time.