Here are two key elements to the game I am playing: make more on your winners than you lose on your losers, and achieve a good win:lose ratio. These two elements interact: you can afford to take profits earlier on your winners if you have more of them, and you can afford to take more chances getting into trades if you make a lot on your winners. A trader might have a reasonable method for getting into trades and a reasonable method for taking profits, both on a standalone basis, but lose money because of the interaction between the two methods.
Also, it is possible to make more good calls than bad ones, but still have a bad win:lose ratio because of execution.
With this in mind, I have decided that I need to collect metrics on my trading style (an evening basking in Adam Cleevely’s engineer’s mental processes helped my thinking here). I need to know:
  • The win:lose ratio.
  • How many losers result from bad market calls, and how many from bad execution.
  • The ratio of the average gain on winners to the average loss on losers.
I will do some more on this tomorrow. In particular, I need to think about how to judge when a market call was a good one, independently of trade execution.