A better way to judge trading success? Develop a trading handicap index - Aussie Stock Forums

1. ## A better way to judge trading success? Develop a trading handicap index

For anyone who is an avid golfer you have probably entered your scores and use a service to give you your handicap index. For those who don't golf, essentially a way to index your golf scores taking into account how tough the courses are etc etc.

With trading quite often I'm asked what % I make annually or how much money I make. This really isn't in my opinion the best gauge of how a trader is doing.

You see, whenever I see one of those trading contests on TV where they applaud someone making 100% in month, what they don't outline is what their trading plan was. Did they go all in and buy millions of penny stocks and get lucky?

Or if say a trader has \$100k and they made \$20k on the year-it shows them as +20%. But what if they only traded \$20k of that stake and thus their trades yielded 100%? Didn't they have a better year than the trader who put the entire \$100k into positions?

One thing I've been working on is creating that same type of handicap index but for traders.

First defining the terms

--how many trades are in the sample
--what is the winning %
--add up all losers-what is the average.
--what is the ratio (if my win trade amount average is \$500 and my lose trade amount average is \$250, then you have a postive 2-1 ratio)

I'll illustrate:

Average amount of winning trades \$1000
Average amount of losing trades \$500
Dividing the win avg/loss avg= 2.0
Lets say this traders winning percentage is 40%
Take 40x2=80 (note since the avg win/loss is + then you simply use the winning % in the calculation)
Index Score of 80

Avg of winners \$1000
Avg of losses \$1000
since they are the same 1000/1000=1
Win% 60
take 60x1=60

Index Score of 60

avg winners \$1000
avg loser \$2000
losers outdo winners 2/1 ratio
winning %60

Since its a negative win amount avg to loss amount avg.
Here is where we take 100- the winning% and then multiply by the loss/win amount ratio and create a negative index score.

so 100-60=40 40x2=80.

Since avg loss outdid avg gains this becomes a negative index of -80

Now a couple points on this- just like 3 rounds of golf where we suddenly find our putting stroke and shoot in the eighties doesn't mean that we will always be in the 80's. This is designed to reward behaviors just as much as results so a larger sample size yields better evaluation.

Another aspect is that with this, traders can see how they are trending.

One other thing- playing with the numbers I can create a 10% winning percentage with say all losers of \$1000 and one winner of \$10,000 over 10 trades and that would have a score of +100 which is higher than trader B. You might say Trader B example wound up with more cash but remember, this is really set up to reward a traders average winners being over time larger and hopefully much larger than losers.

What we learn from this is that the greater the ratio, the less right we have to be. The less our wins are greater than our losses, the more we have to be right.

By the way, if there are any poker players out there-this probably resonates with you as well.

Hope this was helpfull, interesting, entertaining.

Regards

Derek

2. ## Re: A better way to judge trading success? Develop a trading handicap index

I wonder how much this information is going to eventually cost me..

3. ## Re: A better way to judge trading success? Develop a trading handicap index

just trying to start a good discussion.

my golf habit has already cost me plenty

4. ## Re: A better way to judge trading success? Develop a trading handicap index

As of yet Kennas i haven't really seen anything from Tradesurfer that would indicate he is selling anything. So far his posts are not much different than other traders.....so far.

I think the idea of tracking performance against an index is still a great way to gauge your performance as a trader. I can tell you now that i have done worse than the over all index since this rally began.....the periods of consolidation tend to chew up swing traders. In this case maybe its not fair to measure the performance against the index, because during consolidations phases it still basically holds onto the gains, although still fluctuating somewhat.

At the end of the day its profit that matters, nothing else. Unless one is looking for some sort emotional consolation or confidence restorer. I should add that i still consider tracking win/loss rates and other trade data as valuable. Tracking performance of equity against the index i meant was also still a valuable tool for traders, sorry for any confusion.

My

Cheers,

CanOz

5. ## Re: A better way to judge trading success? Develop a trading handicap index

Thank you. Hopefully the quality and time I put into discussions shows and I haven't posted links or anything in my posts. If people find things interesting they will of their own accord find me.

Now back on topic....

The tracking vs the S&P or pick another index brings up some room for good discussion as well. One of my challenges is that a trader who loses say 20% when the index dropped 40% may believe that was positive. But in reality they may not have had a good trading plan. Plus, provided they understand taking advantage of downturns or downtrends, they would have been short and would have profited.

I tend to also thing that many buy and hold(hope) traders may luck into uptrends but, again for another post.

I think my goal with this post was to really focus on money management, trading plan, entry,exits, etc. I think i posted this in the newbie area but I'll repost this now as i think it elaborates more.

"Now to illustrate how wrong with the proper money management a trader can be consider this:
10,000 dollar account and risking no more than 1% on a trade. Out of 10 trades you had one that trended and made 10 percent which happened to be the last one. All others were 1 percent losers. (rounded up or down on all)
10000
9900 -1% 1
9807 -1% 2
9703 -1% 3
9606 -1% 4
9510 -1% 5
9415 -1% 6
9321 -1% 7
9228 -1% 8
9136 -1% 9
10050 +10% 10
This is a 10% win percentage but the trader kept losses "

6. ## Re: A better way to judge trading success? Develop a trading handicap index

Success is subjective, so there really is not best way to judge it. Different methods may also be more or less preferable depending on the timeframe. Example, an index might be a great method for longer timeframes, but I don't think it would be useful for a day trader. There's also no reason why we can't use multiple methods. Some may not feel the need to compare their performance, and personally, all I care is that I'm making a reasonable amount. I'm not really interested in what other traders or the market achieve.

7. ## Re: A better way to judge trading success? Develop a trading handicap index

Nothing new here.
Systems developers are constantly designing systems with high R/Rs.
Well thats the idea.

But as with all systems both in and out of sample testing over multiple periods wont guarentee the same or similar results.

So to "Handicap" any trading method using past results will have little or no bearing to future results.

I judge on smoothness of equity curve.

8. ## Re: A better way to judge trading success? Develop a trading handicap index

My brain obviously wasn't switched on when I posted earlier, I thought you were refering to an actual index. Yes, trading stats can be useful, but they're only accurate over a statistically significant sample, and as Tech says, won't necessarily be indicative of the future.

I do use a number of stats to track my performance such as accuracy at identifying pivots, the size of the stop, the size of my minimum target, how much heat the stop takes etc. These stats are significant to the extent that I know I was trading profitably over that period. However, the stats aren't anywhere near significant enough to be able to compare two different periods, unless one period is great and the other horrible, and all that confirms is that one was great and the other horrible!

9. ## Re: A better way to judge trading success? Develop a trading handicap index

Yeah I refer to it as a traders index like a handicap index for golfer. Realize that might imply index comparison. I have another name for it but didn't want the post to come across wrong as it refers to my endeavor.

Anyway- why i'm interested in working with this formula is that it can be used across different strategies, time frames, etc.

Say one is a daytrader, and the assumption is generally day traders would have to have a much higher winning % than say a trend follower since the average win amounts would be similar to the avg loss amounts. If they are the same it comes down to winning% where a lower % correct trader say 30% could be profitable if their win to loss avg amounts are higher say 4-1 etc.

This also tends to work better for traders with defined strategies- exactly how they enter, how they exit, standard way of choosing position size. Over time it rewards those whose systems are in place. And it could be multiple strategies employed say combining long term trend following with day trading. Evaluating each method and then totaling all the efforts.

someone with random entries or non consistent methods may not benefit though.

Think blackjack- if your bet is the same and your win/loss% is 50- you just broke even. If you compare 100 trips to the tables and your avg down days are \$100 but your average winning days are \$150 with the same 50% win rate, your profitable.

10. ## Re: A better way to judge trading success? Develop a trading handicap index

Say one is a daytrader, and the assumption is generally day traders would have to have a much higher winning % than say a trend follower since the average win amounts would be similar to the avg loss amounts.
Well that's just the flawed "pick winners" rather than "probability and price" mentality that most people have. If you're going to try and educate people on this, you won't get through to most.

Trends occur on every timeframe, and many day traders follow trends. I'm following a series of lower highs and lows right now on the ES.

someone with random entries or non consistent methods may not benefit though.
That would make them poor traders.

You're really just talking about positive expectation. Probability and price.

11. ## Re: A better way to judge trading success? Develop a trading handicap index

"That would make them poor traders.

You're really just talking about positive expectation. Probability and price. "

Agreed. I think my point about someone use the formula by entering in say some successfull luck trades if we can use that term might assume that their methods will always work. Now over time- with a larger sample we understand that traders with no plan tend to burn out.

Agreed on daytrading say with trends on the lower time frame- if your avg winner is higher than your average losers then there is a minimum win% that you have to hit but it can be 30-40% even.

A lot of daytraders and I hate to generalize a group, but my experience is that daytraders tend to be more of the scalping nature or range nature.

But yeah-the point is that whatever time frame one is trading- the winners and losses are what they are and to help quantify a strategy or ones ability to emotionally stick to it, keeping track of results and analyzing them is very important.

The simple fact is that the larger one's avg win is to avg loss, the better. And the higher one's winning percentage is the better.

Traders, especially ones with no plan tend to take large losses and hope to get back to break even.

Trying to gererate some good discussion on the matter and once again why I don't like trading contests where individuals are rewarded for taking too much risk, getting lucky over a short amount of time, and are measured on total % of original assets vs individual trade over trade success