A trader can choose from dozens of metrics and statistics when it comes to performance analysis and it is, therefore, easy to get lost and feel overwhelmed, especially if a trader is not good with numbers or math. It should not be that way and without a good understanding of his numbers, a trader will have a hard time becoming a better trader.
You have probably heard it before but you should treat your trading like a business and this also means that you should know your numbers. Here are the 8 most important metrics every trade should know about his trading – and why.
Initial Reward:Risk ratio (RRR)
It all starts here. Once you enter a trade, you set your stop and target order and then calculate the reward:risk ratio which compares the potential risk and the potential profit. It is an important metric to have because it shows you if the trade offers enough profit potential. However, it is just a starting point as we will see and you should always compare the RRR to the R-Multiple to understand the full picture.
In our Edgewonk trading journal, we took it one step further and created the RRR “traffic lights” which allow you to quickly analyze your RRR values with a visual analysis.
The R-Multiple is similar to the initial RRR but the R-Multiple is a performance metric which means that it describes the final outcome of your trades – whereas the RRR only shows the trade potential. The ‘R’ in R-Multiple stands for ‘Risk’ and, thus, means that the R-Multiple measures your trades in terms of risk units – on a trade 1R is defined by the stop loss size and the risk.
Thus, an R-Multiple of +1 means that you had a winning trade which equals the size of the potential risk (similar to a 1:1 RRR trade). An R-Multiple of +2 shows that you had a winning trade, twice the size of your initial risk and an R-Multiple of -1 means that you had a losing trade where price hit the initial stop loss.
You can compare the R-Multiple to the RRR and see if you see major deviations which would mean that your manual trade management (messing around with trades) could be an issue for you.
It is important to know about the initial RRR and the final R-Multiple, but it’s just as important to know about the potential R-Multiple and how your trade management decisions (moving around stops/targets, manually closing trades, etc.) is impacting your performance. Micro-management and mismanaging a trade is a common problem for traders but very few have a good understanding how much money they are really leaving on the table.
By knowing the potential performance and understanding how to manage their trades best, traders can take out the guesswork and find out how they are actually doing and then trade with confidence. With the potential R-Multiple, you can directly see what you should be doing. The Trade Management area in Edgewonk analyzes your potential performance which shows how much you could have made if you hadn’t interfered with your trades.
Long-term thinking is critical as a trader and one trade alone does not mean anything. Over the course of a month, a year or a decade, a trader will take hundreds or even thousands of trades. But, too often, traders get too upset about individual trades and let them influence their behavior.
Expectancy measures the average profit/loss of your trades. Let’s say that after you have taken 100 trades, you made $8000 profit. This means that each trade has an expected outcome of $80 ($8000/100).
Knowing the expectancy of a trading system is crucial because it builds confidence and a trader can act from a more calm and relaxed state by knowing that over the long-term, his edge will most likely provide a positive outcome if he sticks to the plan.
Average Loss and Average Winner
When we break down the expectancy, we also look at the size of the average winning and the average losing trade. However, those metrics alone don’t provide as much information because they miss one important component: the winrate. It’s even possible that a system has larger losses than winners and still be profitable if the winrate is high.
Looking at the average win and loss can still be valuable, especially if you look for deviations from this metric. If your individual losses differ in size significantly and the numbers are all over the place, it might be time to look into your position sizing a little closer to get more consistent results.
Updraw and Drawdown
The Updraw and Drawdown metrics are unique in Edgewonk and they measure how close price comes to your initial stop loss and take profit orders. With their help, you can fine tune a trading system very targeted to improve the way you set orders which will help you improve overall performance.
A low Drawdown shows that price did not come close to your stop loss and you might be setting your stop too conservatively. By tightening the stop in the future, you can, potentially, improve the reward:risk ratio of your trade; one tweak with big impacts. If you, on the other hand, see that your Updraw exceeds 100% significantly you should consider using wider targets because price usually keeps going after your target is hit. Again, one insight that can have a big impact on your performance.
MFA and MAE
The MFE and MAE measure how much price went in your favor or against you. However, they are only absolute numbers and not percentage based figures like the Updraw and Drawdown.
The MAE and MFE statistics are more suited for trades who don’t use stop loss (not recommended!) or take profit orders. The MFE tells you how far price usually moves in your favor to improve profit taking. The MAE tells you how much price goes against your trades and can help a trader understand drawdowns better.
Emotional capital metrics
We all know that emotions are important but how can you quantify those things? Edgewonk comes with the so-called Tiltmeter which is a feature that measures how well a trader follows his plan, if he obeys his rules and how disciplined he is. With the help of the Tiltmeter, it is finally possible to look beyond pure results-driven metrics and get to the core of a trader’s performance.
Not all winning trades are good and not all losers are bad and whereas no other journal can quantify the implications of process-oriented trading, the Edgewonk Tiltmeter does just that. When your Tiltmeter is red, it shows that a trader repeatedly broke his rules and a green Tiltmeter shows that he made good decisions.
By combining performance metrics with emotional metrics, trading data analysis you can take trade journaling and data analysis to a whole new level.
Advanced Data analysis concepts
There is more to performance analysis than just looking at the raw numbers, but it’s just as important to look at the right data in the right way. Here are 3 things you need to consider when analyzing trading performance:
Separate by setup
Most traders trade multiple setups or strategies. It is then necessary that you can analyze trading and performance data separately for each strategy to get the exact results for each of your strategies. The parameters of each strategy are different and when it comes to making actual changes, you must make them individually for each setup.
Separate by quality
Not all trades are created equally and we talked about this in one of our last articles; being able to separate trades by quality is essential and allows a trader to get to know his performance and his data in a much clearer way.
Data analysis doesn’t have to be boring and a dull task but if you know what you are looking for and if your trading journal tells you exactly where you are screwing up and what is already working for you, journaling becomes a rewarding experience that brings you closer to your goals with each entered trade.
At Tradeciety, we are passionate about journaling and data analysis which is why, over the years, we have improved our own trading journal and then have turned it into a user-friendly software which is no used by hundreds of traders.
You can take a look here, trial it for tree and see how it can help your trading: Edgewonk trading journal