How to evaluate trading performance

Many traders, perhaps most of them, value their trading strategies when trading on CFD markets focusing on the profit or loss that occurred in their portfolio in a specific period. If, for example, there was a profit in the last year, then they value their trading strategies positively, while if there was a loss, they asses them negatively.

However, between the profit and the loss of a portfolio, many other factors need to be assessed to determine the performance of a trading strategy correctly. A profitable portfolio or a portfolio where losses occur can be fairly valued only when connected holistically to indicators that show us the trading strategy's behaviour in fluctuating market conditions.

There are twelve indicators that traders must know and calculate at regular intervals, for example, every year, to evaluate the performance of their trading strategies when trading the markets. In fact, it is about a reliable scorecard of indicators that tells the whole story of a portfolio's year at a glance.

Let's examine these indicators one by one:

Win ratio

In trading, the win ratio refers to the proportion of winning trades out of the total number of trades executed over a specific period. It is a measure of the trader's success in generating profitable trade. The win ratio can be calculated using the following formula:

Win Ratio = (Number of Winning Trades/Total Number of Trades) * 100.

For example, let's say you executed 50 trades and 21 of them were profitable. The win ratio would be calculated as:

Win Ratio = (21 / 50) * 100 = 42%.

Therefore, in this example, the Win Ratio would be 42%.

Payoff ratio

The payoff ratio is a formula used in trading to assess the potential profitability of a trading strategy. It compares the average profit per trade to the average loss per trade and is calculated using the following formula:

Payoff Ratio = Average Profit per Trade / Average Loss per Trade

To calculate the average profit per trade, you sum up all the profits from your trades and divide it by the total number of trades. Similarly, to calculate the average loss per trade, you sum up all the losses from your trades and divide it by the total number of trades.

Here's a step-by-step breakdown of the calculation:

• Determine the number of trades you want to analyze.

• Calculate the profit or loss for each trade. This can be calculated by subtracting the entry price from the exit price.

• Sum up all the profits from the trades.

• Sum up all the losses from the trades.

• Divide the total profits by the number of trades to get the average profit per trade.

• Divide the total losses by the number of trades to get the average loss per trade.

• Divide the average profit per trade by the average loss per trade to calculate the payoff ratio.

Example:

Average Gain per Winning Trade = (500 + 200 + 300 + 400 + 600 + 100) / 6 = $333.33

Average Loss per Losing Trade = (150 + 100 + 200 + 300) / 4 = $187.50

Payoff Ratio = $333.33 / $187.50 = 1.778

In this example, the payoff ratio is 1.778, which means that, on average, the trader makes approximately 1.778 times more profit on winning trades compared to the losses incurred on losing trades.

The payoff ratio is a measure of risk-reward and can help traders assess the potential profitability of their strategy. A ratio greater than 1 indicates a strategy with a higher average profit per trade compared to the average loss per trade, which is generally desirable.

Commission ratio formula

In trading, the commission ratio formula is used to calculate the proportion of the total commission paid relative to the total gross profit generated from trading activities. It is a metric that helps traders assess the impact of commissions on their profitability.

The formula for the commission ratio is:

Commission Ratio = Total Commission Paid/Total Gross Profit.

By dividing the total commission paid by the total gross profit, the commission ratio provides a measure of how much of the overall profit is allocated towards paying commissions. The resulting ratio is typically expressed as a percentage.

For example, if a trader paid $2,000 in commissions and earned a total gross profit of $10,000, the commission ratio would be:

Commission Ratio = $2,000/$10,000 = 0.2 or 20%.

In this scenario, the trader's commission ratio indicates that 20% of their total gross profit is utilized to cover commissions.

Analyzing the commission ratio can help evaluate the efficiency of trading strategies and the efficiency of comparing the costs associated with different brokers or trading platforms. Lower commission ratios are generally favorable as they indicate a smaller proportion of profits being consumed by commissions, leading to higher net profitability.

Largest winning trade

The formula for calculating the largest winning trade in trading is relatively straightforward. It involves comparing the profits or gains from each individual trade and identifying the trade with the highest positive return.

The largest winning trade formula for trading on CFDs (Contracts for Difference) can be calculated using the following formula:

Largest Winning Trade = (Exit Price - Entry Price) x Number of Contracts x Contract Size.

Largest losing trade

The concept of the "Largest losing trade" formula refers to a method used in trading and investment analysis to measure the magnitude of the largest losing trade experienced by a trader or investment portfolio. This formula helps assess the potential risk and downside associated with a trading strategy or investment approach.

To calculate the potential loss, you need to determine the difference between the entry price and the stop-loss level:

Loss per CFD = Entry price - Stop-loss level.

Total potential loss = Loss per CFD x Position size.

The average winning trade

In the context of trading on the CFD (Contract for Difference) market, the average winning trade refers to the average profit generated from successful trades. It is a metric used by traders to assess the profitability of their trading strategy. The average winning trade is calculated by taking the sum of the profits from all winning trades and dividing it by the total number of winning trades.

For example, if you made three winning trades with profits of $100, $200, and $150, the sum of profits would be $450.

If the total number of winning trades is three, then the average winning trade would be $450 divided by 3, which is $150.

The average losing trade

When trading in the CFD (Contract for Difference) market, an average losing trade refers to the typical outcome of a trade that results in a loss. In other words, it represents the average amount of money that a trader tends to lose on each losing trade over a given period.

Here's an example to illustrate how the average losing trade works:

Let's say a trader engages in multiple trades over a month and ends up with a total of 20 losing trades. The total combined loss from these trades is $5,000. To calculate the average losing trade, divide the total loss ($5,000) by the number of losing trades (20). In this case, the average losing trade would be $250 ($5,000 ÷ 20).

Largest number of consecutive losses

The largest number of consecutive losses in trading refers to the maximum number of losing trades a trader experiences in a row without any winning trades in between. It represents a prolonged period of negative performance where each trade ends with a loss.

Consecutive losses can have a significant impact on a trader's psychological well-being and trading capital. They can lead to frustration, doubt, and emotional decision-making, which can further exacerbate losses. It is crucial for traders to manage consecutive losses effectively to protect their trading capital and maintain a disciplined approach.

To handle consecutive losses effectively, traders can consider the following strategies:

• Review the trading strategy being used and assess its performance.

• Stick to the trading plan and avoid making impulsive decisions based on emotions.

• Ensure proper risk management techniques are in place.

• Develop psychological resilience to cope with consecutive losses.

• Consider seeking advice from experienced traders, joining trading communities, or consulting with professionals.

Average number of consecutive losses

The average number of consecutive losses in trading refers to the average number of consecutive losing trades that a trader experiences over a given period of time. It is a statistical measure that helps traders understand the potential downside risk and volatility associated with their trading strategies.

When trading in financial markets, such as stocks, commodities, or currencies, it is common for traders to experience both winning and losing trades. The average number of consecutive losses is an important metric because it provides insight into the potential drawdowns or losing streaks that a trader may encounter.

Largest trading account % drawdown

The largest trading account % drawdown refers to the maximum percentage decline in the value of a trading account from its peak to its lowest point. It is a measure used to assess the risk and potential loss associated with a trading strategy or investment portfolio.

When traders or investors engage in financial markets, they aim to make profits by buying assets at lower prices and selling them at higher prices. However, the markets are inherently volatile, and prices can fluctuate significantly. Drawdowns occur when the value of an account experiences a decline due to market movements.

The largest trading account % drawdown is calculated by taking the difference between the peak value of the account and its lowest point, and then expressing it as a percentage of the peak value. For example, if an account reaches a peak value of $100,000 and subsequently declines to a low point of $80,000, the drawdown would be $20,000 ($100,000 - $80,000) or 20% ($20,000/$100,000).

The drawdown is an important metric for traders and investors as it provides insights into the risk and potential losses they may face. A larger drawdown percentage indicates higher volatility and a higher level of risk associated with the trading strategy or investment portfolio.

Average trading account % drawdown

The average trading account percentage drawdown refers to the average decline in the value of a trading account from its peak to its lowest point, expressed as a percentage. It is a measure used to assess the risk and volatility of a trading strategy or investment portfolio.

To calculate the average drawdown, you would first need to determine the drawdown for each individual trade or investment. The drawdown is calculated by taking the difference between the peak value of the account and the lowest subsequent value, divided by the peak value, and multiplying by 100 to express it as a percentage.

Once you have the drawdown for each trade or investment, you can calculate the average drawdown by summing up all the drawdown values and dividing by the total number of trades or investments.

A higher average drawdown indicates greater potential losses and higher risk, while a lower average drawdown suggests a more stable and conservative performance.

Annualized profit/loss on trading account

The annualized profit/loss on a trading account refers to the measure of the overall profitability or loss incurred over a specific period, typically one year, in the context of trading activities. It provides a standardized way to assess and compare the performance of trading strategies or investment portfolios over time.

The annualized profit/loss on a trading account provides a useful metric for evaluating the performance of trading strategies or investment portfolios over time. It enables traders and investors to assess the profitability or effectiveness of their approach and compare it to benchmarks or industry standards.

Conclusion

The twelve-factor scorecard explained above provides a lot of valuable information to traders as it helps them evaluate the quality of their trading strategies. In fact, with these factors, they can have a reliable and broad view of their portfolio as they can compare the system they follow by evaluating trading performance for each of their trading strategies fairly, with a rational and holistic approach.