I firmly believe that what you don’t measure, you can’t manage properly. May it be your personal SALN, your debts, and even your stock trading performance. So a regular monitoring of Juan’s finances and performance of his investments is necessary, for Juan to know if his objectives are being met or whether adjustments are needed along the way.
To measure performance of our trading, and see whether we are improving or not over time, we can make use of the concept of trading expectancy.
This is a simple calculation to show how much you’re expected to gain or lose, on average, for every trade you make. This is measured by computing the following factors:
- Win Rate
- Loss Rate
- Average Gains (amount)
- Average Losses (amount)
In the following video, trade expectancy is discussed in more detail:
How to Improve My Trades?
Armed with this information, you can now know whether you are improving in terms of trade expectancy over time.
Identifying which from the four factors is causing a negative or low positive trade expectancy is the first step to working on a solution. Oftentimes, the issue is very long winning rate or very high amount of average losses.
Winning rate can be improved with further studying and back testing of which trading strategies have better success rates. Or a better understanding of how markets and the market players work. Or having better trading psyche — discipline, focus, having and following a trading plan, avoiding FOMO, etc.
As for high amount of average losses, the quick win is to study and learn how to cut losses. To keep in mind that the goal is make the portfolio net profitable (meaning after all the gains and losses, net effect is a gain). The goal is not to be right all the time.
Cutting losses is not just a matter of executing but also a matter of trading psyche and discipline. To be courageous enough to remember that there will always be trading opportunities, and that a losing position, when cut, may instead be redeployed to a better trade, instead of the capital being stuck (ipit) in losses, spending too much time waiting to recover (which may or may not happen).
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