Saturday, August 15, 2015

A visual version of tracking trading efficiency

In the Chris Sayce podcast on Chat with Traders, he talks about keeping two portfolios and equity curves - one relating to his actual trading, the other being what he calls his 'Discipline' portfolio, where he is able to track the theoretical performance had he followed his own trading rules to the letter. As he mused, the returns of the theoretical portfolio far outperformed reality. The closer his equity curve can mirror that of his Discipline portfolio, the better his ultimate performance.

This is a visual version of tracking what Van Tharp calls trading efficiency. He advises keeping a log to track your mistakes and quantify them in terms of R. I talked about this here.

As part of this, one of the quirks of trading is that occasionally you can make a profit, or improve the gain on a trade, as a result of a mistake. For example, you might interpret price action and conclude that a trend is close to reversing, and close the trade, even though based on your rules no actual exit signal was given. And, every so often, you may be proved right, and you end up making more than if you waited for your stop to be hit. It is important that these mistakes are also taken into account when looking at your overall efficiency.

In his book Diary of a Professional Commodity Trader, Peter Brandt talks openly about his own trading mistakes. This is something all traders can relate to, regardless of their own trading style, timeframe or parameters. and reinforces the notion that all traders, no matter their level of experience and success, are always learning and trying to improve. This may involve working on the nuts and bolts of their own method, but also on themselves.

1 comment:

  1. Hi Steve and thanks for the this post. That's a really simple but effective idea, one for me to definitely implement. I like Van Tharps approach, too often we jump around with systems looking for the ultimate system but all it takes is to work with the one system and make those improvements by reducing mistakes and tracking trading efficiency.