You should always be well prepared before starting a trading session. We cannot emphasise enough how important it is to keep a trading diary. What should you focus on? In today’s article, you will learn about 5 very significant metrics you ought to include in your evaluation.
5 trading metrics worth considering
The first metric tells you how many of all your transactions have ended up with a profit. To calculate it you should divide the number of the trades that won by the amount of all trades you made.
win percentage = winning trades / total trades
Let’s say you have taken 110 transactions. 76 of them were successful. This means your winning percentage is 69%.
76/110 = 69%.
It is a very important metric, however, it cannot be acknowledged as a stand-alone number. Other factors influence the performance of your system as well. The size of your winning and losing trades matters.
Even with a high win percentage, your trading method will not necessarily bring you good profits if the size of the average winning trade is considerably smaller than the average losing trade. And the opposite, when the size of your winning trade is much larger than the size of the average losing trade, you may get great profits also with a low win percentage.
Expectancy informs about the expected profit per trade. It combines the average win percentage with the average win and loss size.
expectancy = (win percentage x average win size) – (losing percentage x average loss size)
Imagine your win percentage is 69%, an average win size of 600 and an average loss size of 400. What will be expectancy?
(.69 x 600) – (.31 x 400) = 414 – 124 = 290
You have received a positive expectancy which says your system should bring you on average $290 from a transaction.
A negative expectancy implies that such a system will bring a loss.
Let’s say your win percentage is 36%, an average win size of 500 and an average loss size of 450.
(.36 x 500) – (.64 x 450) = 180 – 288 = – 108
This result suggests your system, on average, will lose $108 in a single transaction.
Biggest losing trade
This metric is very simple because it is equal to the amount of the largest loss you have experienced using your strategy. The lower it is, the better. But what is important here for you is to understand why it happened. It is not about regretting and feeling sorry for yourself. It is about learning from mistakes and becoming a better trader.
Keeping a trading diary will help here a lot. You will be able to review your past trades and circumstances. Conclude whether the loss was induced by internal or external factors. And whether you had an influence on that situation. By analysing your past performance you will be better prepared in the future.
The fourth metric describes the deepest decrease from one high to the low before another high is formed. It can only be calculated when a new peak appears.
Let’s take an example. There is $20,000 in the account. After some time, this amount rises to $22,000 but then it declines to $18,000. With time, it grows up to $19,000 and then drops to $17,000. In the end, there is $25,000 in the account. What is the maximum drawdown?
We have a new high at $25,000. The highest peak before it was at $22,000. The lowest trough was at $17,000.
17,000 / 22,000 = 77%
The maximum drawdown in our example was 77%.
The profit factor compares the total winning and total losing amounts and so it describes the profitability of the system you are using.
profit factor = gross winning total / gross losing total
It is better for your trading system that the profit factor stays high. The best systems reach above 2.01. Quite good systems are characterised by profit factor between 1.41 and 2.00. Moderately profitable ranks between 1.10 and 1.40 and unprofitable remain below 1.
Let’s calculate the profit factor for a system with which a trader gained $25,000 and lost $15,000 during one year.
25,000 / 15,000 = 1.67
This means a trader is using a quite profitable system.
Risk is inseparably linked with trading. You will win and you will lose. The thing is how to do it that the amount in the account rises despite occasional losses. Well, as I said in the beginning, you should always be well prepared. And a trading journal will surely help you do that.
I have just described 5 very important metrics for every Olymp Trade trader. Take them into account when you perform an evaluation of your trading method. Do not get discouraged if something does not go as you expected. Draw conclusions and act confidently the next time you begin a trading session.
If you want to check a new approach in a safe risk-free environment, I encourage you to check the Olymp Trade demo account. You will get virtual cash there so you can practice without worrying about losing money from your trading account. Naturally, the profits you make there are also virtual, so move to the live Olymp Trade account whenever you feel like you know the method well.
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