The Most Important Trading Metrics

PRO INSIGHTS
The Most Important Trading Metrics

Ok so as you know I preach all the time about how you should be gathering data… 

Backtesting data, demo trading data, and journaling all your live trades. It’s the only way you can make informed decisions.

Now once you have this data what should you look at? 

Well, I happen to be the founder of one of the industry's top backtesting platforms so this is a subject I know quite a lot about!

Let me break down the key metrics I think are the most important…

Understanding these trading metrics is crucial for any trader, as they provide valuable insights into the performance and reliability of trading strategies. Here's a breakdown of each metric:

1. Profitability - Profit Factor

   - Definition: The profit factor is a measure of the profitability of a trading system. It is calculated by dividing the total gross profit by the total gross loss (including commissions and slippage).

   - Why It's Important: This metric helps traders understand how much profit is generated for every dollar of loss. A profit factor greater than 1 indicates a profitable system, while a value less than 1 signals a losing system. The higher the profit factor, the more profitable the trading strategy. It's a quick way to gauge the effectiveness of a strategy over a period.

2. Risk - Max Drawdown

   - Definition: Max drawdown represents the largest peak-to-trough decline in the value of a portfolio or trading account, usually quoted as a percentage of the peak value.

   - Why It's Important: This metric is crucial for assessing the risk involved in a trading strategy. A high max drawdown implies a higher risk, indicating that the strategy can potentially lose a significant portion of its value. It helps traders understand the potential losses they might face and whether they can tolerate such risk. Managing drawdowns is essential for long-term sustainability in trading.

3. Data Quality - Total Trades or Trading Days

   - Definition: This metric refers to the total number of trades executed or the total number of trading days considered in a trading strategy.

   - Why It's Important: The total number of trades or trading days is a measure of the robustness and reliability of the trading data. A higher number indicates more data points, which can lead to more reliable and statistically significant results. It helps in determining the consistency of a trading strategy. A strategy tested over a larger number of trades or a longer period is generally considered more reliable than one tested over fewer trades or a shorter period.

Each of these metrics plays a pivotal role in evaluating the effectiveness, risk, and reliability of a trading strategy, enabling traders to make more informed decisions and improve their approach to the markets.

Now, there are a ton of other metrics like average profit/loss, biggest profit/loss, RR Ratio, etc. 

The thing is, you only really need to track 3 things…

1. Is your system profitable (profit factor)

2. Is it risky (drawdown), and

3. Do you have a lot of data to support this (total trades or days)?

If you have a strategy with a high profit factor, low drawdown, and a lot of data (atleast 20 points of data, ideally 100). Then you’re doing great! If not, improve one of those metrics…

These are crucial and you should know your stats inside and out.

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REDDIT QUESTION OF THE DAY
What Went Wrong With This Trade?

I see very often that users on Reddit will post questions showing their trades and asking where they went wrong. 

So let me ask you, where did this trade go wrong?

Now if you’re like most traders, you probably have some technical answer about how he didn’t place his support properly or didn’t wait for a bullish engulfing pattern, or for some smart money concepts liquidity zone, bla bla bla. 

All of that is BS.

Always remember the 5 fundamental truths about trading. 

1. Anything can happen.

2. You don't need to know what is going to happen next in order to make money.

3. There is a random distribution between wins and losses for any given set of variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

5. Every moment in the market is unique.

So in this case, the trader made an analysis, the market did what it wanted without a care in the world about his analysis and he lost the trade. 

Time to move on to the next trade. Thats it. 

Now if I was him I’d be sure to do a lot of backtesting and ensure his edge is strong over time.

There’s also some risk management errors here, like for instance he could have moved his stop to BreakEven at some point.

However, for any singular trade, asking the question of “what went wrong” (unless it was an emotional human error) is completely irrelevant and not helpful to one’s trading. 

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STOIC QUOTE OF THE DAY

This quote reflects the Stoic philosophy's emphasis on contentment and the dangers of insatiable desire. It suggests that true poverty comes not from a lack of material wealth, but from an unending desire for more, highlighting the importance of finding satisfaction in what one already has.

It’s not that wanting more is bad, but you have to do it for the right reasons. If its because you love pushing yourself and love what you do then that’s great!