7 Statistics for Analyzing Your Trading System
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These statistics will vary over time, sometimes being better when market conditions are favorable, and sometimes they will be worse when market conditions aren’t as favorable. Knowing better our investments could be a great help but also monitoring the statistics gives us clues as to whether our trading plan needs to be adjusted. The statistics also give us a wake-up call when we aren’t following our plan.
1.Win RateCopy link to section
Win rate is how many trades we win out of how many trades we take. If we win 60 trades out of a 100, the win rate is 60%. This statistic is not all that useful on its own, because it doesn’t account for how big winning and losing trades are. A low win rate can still produce an overall profit if the winning trades are very big compared to the losing trades. The Turtle traders were a good example of this. They had a low win rate, but their winners, when they occurred, were huge.
If gains aren’t as big relative to losses, a win rate of 50% or higher is the goal. Short term traders often strive for a win rate above 50% and winning trades that are at least slightly bigger than losers (more about this in reward:risk below).
This trading metric is important once you develop a trading style and know approximately what number this statistic should be. During your demo trading you may find that your best trading occurs when your win rate is between 55% and 65% (just an example, will vary by trading plan). When you move out of this range overall profitability drops (profitability is discussed later). Therefore, when your win rate moves out of your range, whatever it may be, it lets you know that market conditions have changed or you are doing something different which may need to be corrected.
2.Reward:RiskCopy link to section
Reward-to-risk is a ratio that shows how big winning trades are relative to losing trades. For example, many traders may strive to only take trades where they think they can make at least 1.5 times the risk (1.5:1). For example, risking $100 with the expectation of making $150 or more. Other traders may strive for a higher reward:risk, say to 2:1 or 3:1.
These statistics should be considered along with win rate. The lower the win rate, the higher the reward:risk required to be profitable. With a higher win rate, the reward:risk doesn’t need to be as high for a system to be profitable. Traders needs to find a balance between these two statistics in order to be profitable.
3.ExpectancyCopy link to section
Trading expectancy is a statistic that combines the win rate and reward:risk ratio. It provides a dollar figure for the expected profit or loss on each trade. Positive is good, and shows that the trading system is producing profitable results. A negative number indicates the strategy is, or will, lose money.
Expectancy is calculated as (% wins x average win size) – (% losses x average loss size).
Assume a trader wins 60% of their trades. They lose $100 on losing trades and make $150 on winning trades (1.5:1 reward to risk).
(60% x 150) – (40% x $100) = 90 – 40 = $50. For every trade this trader takes, on average they can expect to make $50. That may sound a bit weird, since we know the trader is losing $100 or making $150 on each trade, but this statistic is giving us an average of all trades.
Assume another trader wins 70% of the time and makes $100, and on the 30% of losing trades they lose on average $300.
(70% x $100) – (30% x $300) = $700 – $900 = -$200. This trader can expect to lose on average -$200 for each trade they place. Even though the win rate looks good, the losses are too big and result in a losing system (see more: What is Trading Expectancy and How It Works).
4.Maximum Consecutive LossesCopy link to section
Monitor how many losing trades you had a row, while still being profitable. This is important for maintaining confidence during the rough patches. If your statistics show that you once had a 10 trade losing streak, but were still profitable overall for the month, that can help you stick with your plan when the next batch of losing trades comes.
This is why testing a system before using it is so important. With no testing, there is no reference point for whether results are good or bad. For example, a profitable system may routinely have 4 or 5 losing trades in a row, before a string a good ones. Without this knowledge, a trader may throw in the towel after only a few losses, missing out on the upcoming profit. Each system and each trader is different. Spend time in a demo account and learn the ebb and flow of winning and losing trades. This will help keep track of when a system is operating properly, but just in a rough patch, or when it has gone off the rails and needs to be adjusted.
5.Maximum DrawdownCopy link to section
Maximum drawdown is the biggest percentage drop in capital witnessed while using a system. It is calculated as the difference between a high point in capital and a low point that occurs after. There is no time restraint on this metric. For example, and if the trader deposits $10,000, goes up to $15,000, but then starts losing money, they may drop to $8000. They make a bit back and go up to $11,000, but then lose more and drop to $7,000. This traders maximum drawdown is continually increasing, and therefore there is a big problem. Likely the issue can be found by analyzing the statistics above.
A profitable trader may have a bad period and go from $30,000 to $24,000, before recovering all the losses and bringing the account back above $30,000. In this case, the trader’s drawdown was 20%. This provides a frame of reference. The trader knows that as long as they are following their plan a 20% (give or take a few percent) drawdown may occur, but is by no means the end of the world. As with maximum consecutive losses, maximum drawdown provides a reference point for what size of losses are normal.
6.Number of TradesCopy link to section
Number of trades is important because it determines how much money we make. Less or more trades isn’t necessarily better, but we want the right number of trades for our trading system.
If we have a positive expectancy, we want to take as many valid trades as we can, because if we average $100 per trade, the more trades we take the more money we make. Yet we want to watch our statistics, because if we start taking more trades just for the sake of taking more trades (not valid ones, or low quality ones) then our expectancy may start to plummet as our win rate and/or reward:risk drop.
As with all things in trading, there is a balance. Get over-zealous and it will probably hurt results. Not being aggressive enough (skipping valid trades) means we are leaving money on the table, assuming the strategy has a positive expectancy.
One thing is certain, if you have a negative expectancy, don’t take ANY trades with real money until you work on your system and make it profitable. If you have a negative expectancy, the more trades you take the quicker the account drops to $0.
7.ProfitabilityCopy link to section
In trading, the desired result is to make money and subsequently analyze how much money can make a trader. Although, ironically, making money should NOT be our goal. Our goal should be to simply follow our trading plan (assuming it has a positive expectancy), because if we do that the money will follow.
Profitability is the return on starting capital in the account (for each term) over a month or year. Short-term traders are often more concerned with their monthly return, but typically also calculate yearly return.
Assume a trader starts with $10,000 and ends the month at $12,000. The return for that month is 20%. The next month, the trader is starting with $12,000 and moves up to $13,000, or 8.3%. The next month the trader starts with $13,000 and moves up to $15,500, or 19.2%. So far, this trader has an average monthly return of 15.8% [(20 + 8.3 + 19.2)/3]. Substitute yearly figures to calculate yearly returns.
When profitability wanes, goes negative or we aren’t seeing the profitability we want, clues as to why are revealed in the statistics above. If profitability is lacking, we may need to consider altering our reward:risk by looking for trades with a higher profit potential. If our win rate is high, but we are still losing money, we may need to reduce the size of our losses with stop loss orders, or hold our winning trades for a bigger profit.
There are a number of possible issues a trader can have, including psychological issues which prevent them from following their plan, but most trading-specific issues can be highlighted by these statistics if the time is taken to track and analyze them.
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