The Risk of Trading: Mastering the Most Important Element in Financial Speculation

BASIC PRINCIPLES OF MEASURING DATA

Your trading goals and particulars about your trading style come into consideration as to what you will be measuring. Ask yourself what the key variables are that, if successful, will give you an advantage in trading and thus allow you to meet your business goals and objectives. The infamous win-loss percentage is a popular measure and comes under much criticism in the trading community. It can be misleading since it does not consider any risk factors in the process of obtaining an attractive number. I have seen many traders go out of business with a 70 percent win percentage due to their disregard for risk. Their losing trades more than wiped out their winning ones even though the latter were in the majority. Win-loss percentage can be and is an effective measurement when used in combination with other measures, such as risk-reward and execution accuracy. My personal primary measurement for success is plan compliance expressed as a percentage of total trades. The belief is that if traders follow their plan effectively with little or no errors or emotional decisions, such as intentionally passing on a valid setup in compliance with all rules and filters, they would be successful over a valid sample size of trades. While profit and loss is the most common measurement for most traders, there is a direct correlation between plan compliance and success. Failure to implement a plan correctly results in greater losses and results below expectations. ...