Ruben JR
New Member
5 Most Important Trading Metrics Explained
If there is one aspect of trading that many traders seem to spend much less time on than they should, it is in the objective evaluation of their trading system performance. It seems to be an activity that often gets brushed aside. This five key performance metrics that every trader should start paying more attention.
Win Percentage
One of the easiest to understand trading metrics is Win Percentage. It tells us how many winning trades that we have in relation to the total number of trades taken.
For example, if the total number for trades taken is 140 and the number of winning trades was 77, then the win percentage would be 55%
This is fairly simple to understand for most traders. Generally, many traders tend to aim for a high win rate, however, a win rate alone does not make for a profitable trading system. The average size of your winning trades and the average size of your losing trade also needs to be taken into account when evaluating expected profitability.
Expectancy
Provides a simple but efficient means for evaluating a trading strategy or system at any given account size.
Trading expectancy is computed by combining both the average win percentage with the average win:loss ratio.
Largest Losing Trade
Another important metric that a trader should know is their largest losing trade.
It will help in system design and stress testing of your strategy.
Your largest losing trade is self-explanatory and measures the amount of the single largest loss incurred.
Expectancy = (Winning Percentage x Average Win Size) – (Losing Percentage x Average Loss Size)
Maximum Drawdown
Many amateur traders tend to focus on total returns rather than risk-adjusted returns. Total returns by itself are quite meaningless and do not accurately provide a true measure of a system’s performance. Risk-adjusted returns, on the other hand, is a much more valuable way to assess system performance.
Maximum Drawdown measures a portfolio’s largest peak to valley decline prior to a new peak in the equity curve.
Profit Factor
Profit Factor measures your system’s profitability. Profit Factor is essentially a ratio that compares your total winning amount to your total losing amount.
Every trader should do their utmost to try to understand the inner workings and performance data of their trading system or strategy. We have touched upon five of these key trading performance metrics. They should serve as a starting point from which to build a risk model that you can be comfortable with and apply in a real market trading environment.
Without the proper insight into the strengths and weaknesses of your system, you are relying more on luck than empirical data. And unfortunately for those relying on luck, it runs out sooner or later. As such, it is paramount that you evaluate your trading performance using hard data that can be analyzed objectively. Remember, that which can be measured can be improved.
If there is one aspect of trading that many traders seem to spend much less time on than they should, it is in the objective evaluation of their trading system performance. It seems to be an activity that often gets brushed aside. This five key performance metrics that every trader should start paying more attention.
Win Percentage
One of the easiest to understand trading metrics is Win Percentage. It tells us how many winning trades that we have in relation to the total number of trades taken.
For example, if the total number for trades taken is 140 and the number of winning trades was 77, then the win percentage would be 55%
This is fairly simple to understand for most traders. Generally, many traders tend to aim for a high win rate, however, a win rate alone does not make for a profitable trading system. The average size of your winning trades and the average size of your losing trade also needs to be taken into account when evaluating expected profitability.
Expectancy
Provides a simple but efficient means for evaluating a trading strategy or system at any given account size.
Trading expectancy is computed by combining both the average win percentage with the average win:loss ratio.
Largest Losing Trade
Another important metric that a trader should know is their largest losing trade.
It will help in system design and stress testing of your strategy.
Your largest losing trade is self-explanatory and measures the amount of the single largest loss incurred.
Expectancy = (Winning Percentage x Average Win Size) – (Losing Percentage x Average Loss Size)
Maximum Drawdown
Many amateur traders tend to focus on total returns rather than risk-adjusted returns. Total returns by itself are quite meaningless and do not accurately provide a true measure of a system’s performance. Risk-adjusted returns, on the other hand, is a much more valuable way to assess system performance.
Maximum Drawdown measures a portfolio’s largest peak to valley decline prior to a new peak in the equity curve.
Profit Factor
Profit Factor measures your system’s profitability. Profit Factor is essentially a ratio that compares your total winning amount to your total losing amount.
Every trader should do their utmost to try to understand the inner workings and performance data of their trading system or strategy. We have touched upon five of these key trading performance metrics. They should serve as a starting point from which to build a risk model that you can be comfortable with and apply in a real market trading environment.
Without the proper insight into the strengths and weaknesses of your system, you are relying more on luck than empirical data. And unfortunately for those relying on luck, it runs out sooner or later. As such, it is paramount that you evaluate your trading performance using hard data that can be analyzed objectively. Remember, that which can be measured can be improved.
