12 Ways to measure your trading performance

Education / 6 Min Read
Milan Cutkovic / 28 Sep 2021

Focus, achievement and transparency. Three words that capture the essence of being able to track your performance as a trader.

It would be a fair assumption that you and your friend or family are highly competitive people.

The likelihood is, you have been competitive and looking to raise your standards as a youngster at school, on the sporting field, and then when you started your trading journey.

For most, none of this would have been possible without a way to measure and track your performance.

But the challenge is, trading is one of the most isolated activities around. You can’t exactly ask another trader to create a dashboard and share their results.

But wouldn’t it be nice if you had a community of traders where you can aim for consistent and measurable improvement?

Before we tell you how that is possible, let’s look at how to measure your trading performance and what the definition of good performance actually is.

What is trading performance?

The term 'trading performance' refers to a method of evaluating how a trader is doing with their trades.

An easy form of measuring performance may be a simple return on capital calculation. For example, if a trader deposits $1000 and achieves a profit of $500 during a certain period of time, his return would be 50 %.

However, focusing purely on your return and ignoring the rest isn't the best way to approach it and you would be missing out on a lot of useful information that can help you improve your trading. There are plenty of ways you can measure trading performance and in this article, we will discuss some of the most popular ones.

Analysing your trades with trading performance reports and trading performance graphs

Trading performance reports are reports that provide you with a history of your trades along with key performance statistics.

In MT4, you can retrieve such a report at any time by selecting "Account History" within your terminal.

First of all, you will have to define the time period you want the report to cover. Once you have all the data you want within the "Account History" tab, you can again right-click anywhere within the tab and click on "Save as Detailed Report".

Steps to get a detailed report in MT4

 

MT4 will generate a detailed report that will look as follows:

Example of detailed report in MT4

Beneath the list of closed and open trades, you will see a list of useful performance statistics.

You will also notice that there is a graph.

A performance graph is an easy way to visualise your performance and how consistent you are at generating profits.

Traders that are consistently profitable will have a performance graph that shows an upward trend without major slumps. 

On the other hand, traders that lack consistent results will see huge swings on the performance graph - for example, a sudden spike followed by a crash.

Recommended reading: What is trading psychology and why is it important?

What is good performance?

There is no correct answer to this question. Again, it is important not to look only at the Dollar or percentage return a trader achieves during a particular period of time.

Imagine that you meet two traders. Trader A generated a return of 50% within 3 months, while Trader B generated a return of 5% within the same period of time. If this was the only information you had, you would probably say that Trader A is the more successful trader out of those two.

However, without seeing the full picture, it is impossible to know. If we look closer at their performance, Trader A might lack a proper risk management plan and got lucky on a few trades. His performance graph may show large spikes followed by sudden declines.

On the other hand, Trader B's graph shows consistent performance as he has a solid trading plan with sound risk management rules in place.

What defines good performance in trading is also very personal. Comparing your performance to other traders will not benefit you. Instead, you should define your own goals and ask yourself what it is that you want to achieve by trading.

Ways to measure your trading performance

Discover 12 common ways to measure your trading performance below:

1. Absolute drawdown

The difference between the initial deposit and the lowest point the trading account reached below the deposit level. For example, in a trading account with an initial deposit of $5000, a peak of $6000 and a minimum value of $3000, the absolute drawdown would be $2000 ($5000-$3000 = $2000). It is a representation of the biggest loss compared to the initial deposit.

2. Relative drawdown

Unlike the absolute drawdown, the maximum drawdown is comparing the peak to the lowest value the account has reached. Using our previous example, the absolute drawdown would be $3000 ($6000 - $3000).

3. Average win size vs average loss size

A ratio of the average profit per trade compared to the average loss per trade. For example, if a trader can expect a profit of $1000 per trade and a loss of $500 when he is wrong, the profit/loss ratio will be 2:1 ($1000 / $500).

4. Profit factor

Profit factor shows how much money you make relative to how much you lose on your trades. For example, let's go through your last 5 trades. You made money on 2 trades, $500 on one particular position and $800 on the other. You lost money on 3 trades, $150 on each, which gives a total of $450. If we divide the total value of the winning positions ($1300) with the total value of the losing positions ($450), we get the number 2.89. It means that your profits were 2.89 times higher than your losses.

5. Sharpe ratio

A popular ratio of risk-adjusted returns. The higher the ratio, the higher the return a trader can expect in relation to the risk taken. Traders often aim to have a Sharpe ratio of 1 or higher, as a figure lower than that suggests that he/she is taking too much risk compared to the expected return.

6. The “2%” Method

With this method, you pick a percentage that you are willing to risk per trade and do not exceed it. While every trader can pick their own percentage, the 2% is a figure commonly used. The idea is to prevent excessive drawdowns on a single trade.

7. Measuring points or pips

With this method, you focus on the amount of pips/points you are willing to risk per trade. However, while you may express that you risked "20 pips on a trade" when speaking to fellow traders, it is not actually a method you should apply. After all, it is real money that you are risking, and you should define it in Dollar terms and % risk.

8. Measuring based on "R."

The focus here is on the risk to reward ratio. "2R" would for example mean that the reward on a particular trade should be twice the risk - e.g. a potential profit of $20 for risking $10 on a trade. 

9. Win percentage

The win/loss ratio will show how many winning trades are relative to the number of losing trades a trader has. If out of 10 trades, you end up with 6 winning trades, you would have a win ratio of 60 %. In trading, it is not unusual that profitable traders can have a win ratio of less than 50 %. This could be because the profit they make on their winning trades far exceeds the loss they make on their losing trades. 

10. Sortino ratio

Sortino ratio is very similar to the Sharpe ratio, but it was designed as an improved version of it, as it focuses on penalizing only the downside volatility, but not the upside volatility. After all, traders don´t want to view unusually high positive performance as a negative occurrence. 

11. Calmar ratios

Another ratio that measures the risk-adjusted return. The difference between the Calmar and the Sharpe/Sortino ratio is that the Calmar ratio takes the drawdown, and not the volatility, as a risk measure. While it has its uses, traders might find the Sharpe/Sortino ratio more useful as a measure to evaluate a trading system.

12. Gross vs net return

A gross rate of return shows an investment's return before any expenses/costs. A net rate of return shows an investment´s return after any expenses/costs. In forex trading, this could be for example swap charges and commissions paid to the broker.

Get serious about measuring your trading performance

Make this the year to get serious about tracking your trading performance!

 

Sign up for a live trading account today and get access to PsyQuation for FREE! Start measuring your trading performance with AI and Machine Learning.

 

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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