How do you track and measure your trading performance? What is the best tool to track trade performance? And, how do you evaluate how good or successful you are as a trader?
Trading performance, tracking and monitoring the performance of our trading practices, and how to improve trade performance is one of the top topics in the world of financial trading. That’s because only through tracking and monitoring our trading activity can we improve our trading performance and increase our profits.
Tracking trade performance is the process through which a trader can monitor and evaluate different trade-related metrics to evaluate current trading performance and then optimize it for better profitability.
Most forex traders overlook the importance of measuring trading performance. It is commonly measured in terms of total profits and losses, which is not completely accurate. Net profits and losses may be a strong factor in the equation of measuring trading performance; however, along your forex trading journey, measuring your overall trading performance effectively is the key to consistent long-term profits.
So, what is Trading Performance?
Trading performance refers to the trader’s activity, that has to be measured to evaluate how successful the aggregate trading activity is. Measuring forex trading performance can simply be done through calculating return on capital. For instance, if a trader makes a $100 profit from a $500 trading account, that means the total return rate is 20%. Nevertheless, focusing only on profits is not the ideal way to evaluate how successful your trading is. It can be a misleading approach if you want to improve how you trade. Instead, we will outline some popular easy yet effective ways to measure your trading performance.
How to Measure Your Trading Performance?
Most traders will simply answer this question by stating that how much money they are making measures their performance. Of course, making money is the key objective of forex trading, or any investment out there. But, does the quantity of money made alone sufficiently reflect how good or bad we are at trading? Actually, it can’t be the only factor we count on when it comes to evaluating the trading activity. These numbers will not pinpoint the weakness in our trading practices.
One best way to evaluate trading performance is to track how we are performing in different trading aspects, find out our strengths, and most importantly get to know our weaknesses to improve them. That is how we can make changes in our trading performance and profitability.
Trading performance reports provide you with insights from your trading history with key performance statistics. In Metatrader 4, MT4, you can extract performance reports at any time by going to the “Account History” tab within your terminal. You will have to choose the time period you want to track. Then, you can click on “Save as Detailed Report”.
The generated report will be as shown below, it shows a list of all trades; closed and open. In addition to some useful performance statistics, A performance graph easily visualizes performance and how consistent profits are being generated. Traders with consistent profitability will have a performance graph that shows an upward trend without major slumps. On the other hand, traders with no consistent profits will have huge swings on their performance graph.
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Ways to Measure your Trading Performance
Winning vs Losing Trades Statistics
The success rate of your trades is a very indicative number when it comes to performance tracking. Generally, traders want to win more often than they lose, but what really matters is how balanced your average win and loss ratio is.
Consecutive Winning and Losing
Successful traders are capable of achieving a more consistent profit through consecutive winning trades. That doesn’t mean that consecutive losses are not possible. But those who track their trading activity are more capable of assessing market conditions for every trade, and evaluate when it is the best time to open a position and when they protect themselves from poor conditions. Analyzing market conditions, monitoring and tracking will make you more experienced in forex trading and knowing how to maximize your gains in good market conditions.
Trade Holding Time
Traders tend to close winning trades too early to keep profits, while holding on to losing traders hoping they’ll come good. Frankly speaking, that’s the case especially between beginner and amateur traders. However, professional traders know how to develop an entry and exit strategy that they can stick to. If you are trading according to a preset trading plan, then you’ll be able to control your fear and greed emotions and make better trading decisions. See how you can develop a successful forex trading plan.
The Profit Factor
The profit factor is the ratio between gross profits and gross loss. It is determined by taking the total of your winning trades divided by the gross losing trades to determine your profitability. It is a common method of measuring trading performance that shows the specific amount of money made per each dollar risked. A profit factor can be applied for any backtesting, demo account and live trading performance.
A profitable performance will show the gross profits higher than gross losses. While in a losing performance, the gross losses will be larger than the gross gains creating a negative profit factor lower than 1.
A drawdown is the reduction in equity capital from its peak. It is a fundamental metric to gauge the amount of lost capital incurred from losing trades. There are three main types of drawdowns; absolute, maximum and relative. The absolute drawdown measures the difference between initial deposit and smallest value of equity, showing how much the equity has ever fallen below the deposit level. Maximum drawdown is the difference between an all-time high to the all-time low of an account balance. Relative drawdown is the difference between the maximum equity high to maximum equity low, it is not fixed as it is measured on the equity.
Small drawdowns profitability means that risk to reward ratio is probably good. But, profitability with huge drawdowns is a warning flag, you could be risking too much to achieve those profits. Consider checking these 10 steps for better forex risk management.
Average Win Size vs Average Loss Size
The ratio of the average profit per trade to the average loss per trade can tell so much about your trading performance. It is wise to keep your profit/loss ratio at 2:1 or higher, meaning that potential profits should be at least double the potential losses.
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