Measuring Your Trading Performance
Stockscores.com Perspectives for the week ending October 26, 2015
In this week's issue:
In This Week's Issue:
- Stockscores Trader Training - November
- Stockscores' Market Minutes Video - The Stock Market Can Not Be Predicted
- Stockscores Trader Training - Measuring Performance
- Stock Features of the Week - The Echo
Stockscores Trader Training in November
We will have some live webinars, webcasts and trader training for Active Traders and Investors coming this November, watch this newsletter for more details.
Stockscores Market Minutes Video - The Stock Market Can Not Be Predicted
We make money in the stock market because it is unpredictable and uncertain. This week's video discusses how to deal with that fact.Click Here to Watch To get instant updates when I upload a new video, subscribe to the Stockscores Youtube Channel.
Trader Training - Measuring Performance
As a trader, how you judge success will have an effect on how you approach the market. Define success incorrectly and you may doom yourself to failure before you ever make a trade. I think unrealistic expectations are a major reason why most people cannot make it as traders. I want to help by showing you how to judge performance and what your expectations should be.
Conventional wisdom leads most to judge success using percentage gain over a time period. This seems to make a lot of sense but it has problems over time. Anyone can get lucky in the relative short term, making them think that they are smart because the market hands them some nice returns. However, the market cycles and if you fail to catch one of the strong up cycles that lets everyone be a winner, you will probably lose it all.
Risk management needs to be part of your criteria for judging success.
It is also important to recognize that the stock market is extremely hard to beat and it is nearly impossible to know what one individual stock will do. With good strategy testing, you can judge what a set of rules will achieve over a large number of trades and use that as your gauge.
Therefore, it is dangerous to judge success over a small number of trades.
A strategy's potential is measured by its expected value. A strategy that is wrong 90% of the time can still be a great money maker if it makes a lot when it is right. With the same logic, there are strategies that are almost always right but which still lose money because the gainers are outweighed by the losers.
So, do not judge success the way you judge performance on a test, it is about how much you make when you are right versus how much you lose when you are wrong.
Each trade does not have an equal weighting in the measure of overall success. In my trading, I find that I have lots of small winners and small losers that tend to balance each other out. However, it is the occasional big winners that serve as the source of most of the profits.
You have to be patient to let the big winners happen.
Let's know go through an example of how a trading strategy might work.
Suppose you have a set of rules which, after exhaustive testing, has the following characteristics:
Right 70% of the time, wrong 30% of the time
When it is right, the average profit is two times the average loss
The most common profit is one times the average loss
Once in ten trades, there is a profit that is five or more times the average loss
How would unrealistic expectations destroy the potential of this strategy?
What would happen if the trader expected to never be wrong and, as a result, hung on to his losers until they became winners? Since some trades will never be winners, this would mean he would have much larger losers than the disciplined trader who used stop loss points and planned his losses. Instead of having an average reward for risk of two to one, it might be one to two.
What would happen if the trader judged her performance one trade at a time? With each win - elation. With each loss - despair. This emotional rollercoaster would affect their ability to make the right trading decisions and eventually the trading rules would be broken. The trader would fall apart.
What would happen to the trader who did not understand the expected value of their trading strategy? They would likely fail to limit downside and maximize upside. They would think it was good to make a certain amount of money on a trade rather than judge their success by how much reward they earned for the risk that they took. In time, they would be broke.
Finally, what would happen to the trader who failed to let the big trades happen? Since the majority of their profits come from a minority of their trades, the strategy that they tested and found to be profitable would fail to be so in real trading. The emotional desire to lock in fast profits rather than let the winners run would turn them in to traders with a high success rate but not a lot of profits.
Change how you judge success so that you can approach the market with the mindset of the winning trader. This may contribute more to your success than your ability to pick the right stocks.
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It is earnings season and this week is the busiest for announcements so there will be lots of action. If a company impresses investors with their announcement of earnings, the stock will often gap higher. These price gaps are a bit scary to trade because the distance down to support is far and that makes entry risky.
Often, these big gappers will pull back for a day or two after the big gap up and then resume their upward trend. This presents a great opportunity for the savvy day or swing trader who does not forget about the hot stocks of a few days ago. When stocks are hot on news, keep them on your watch list for a few days and wait for the echo, a break of a pull back after the gap. Here are two stocks that made big gaps in the last week and then went on to surge higher after a brief pause. These are not here for you to trade now, but as examples of what to watch for as other companies do the same thing on the heels of earnings news:
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1. MSFT
MSFT sold off in to the close on Friday but broke that pull back this morning at around 10:22 and went for a good push up in to the close, giving the day trader a better than 3 to 1 reward for risk pay off. That means $1000 risked made over $3000 for the day.
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2. MCD
MCD is a stock that I shorted on the open after it gapped up on good news. I did not hold the position long as it soon stabilized and resumed its upward trend. Nice break of the pull back at around 10:30ET on Oct 22 that lead to a nice run over the next couple of days.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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