Evaluating performance in any sphere is essential to measure progress and improve one’s strengths or weaknesses. In the highly competitive world, you live in, you need to be on top of your game, be it in the field of play or office. It is not good enough to be content and relax on past laurels. You need to raise the bar constantly if you want to stay ahead of the pack. It is an eternal race to be among the top resulting in the survival of the fittest if you don’t want to be left behind.
The same philosophy applies when measuring the trading performances of a forex trader in a given time. It is not as simple as counting whether you made profits or losses in monetary terms. To achieve high performance as a forex trader, you can choose suitable forex brokers on Brokersview.
But it is mandatory to be on the ball about the latest developments and be able to think on your feet when there is a crunch situation. You must be able to analyze what went wrong on a bad day to avoid making costly mistakes in the future. Successful people don’t live in the present but are always many steps ahead of ordinary people because they draw up strategic plans with an eye on the future.
Measuring trading performance is a means of evaluating how a trader is doing. The simplest method is by calculating the return on investment. For example, if a trader has invested $500 and gets a profit of $100, he has gained 20 percent. However, merely focusing on the figures without evaluating the process is not the ideal approach.
Many top forex traders make the proverbial mistake of not giving preference to reviewing performance when there are many resources available at their disposal to plan trading strategies by spending some time on research. Gauging performance only in dollars is not the be-all and end-all of a consistently successful trader. It doesn’t give the actual picture of whether it was a direct result of a particular trading strategy you adopted because many factors contribute to this process. You have to understand the metrics that produce the best results and analyze them properly to play the game well for a long time.
Trading performance’s essential function is to monitor trading practices to enhance profits and mitigate losses. Many different metrics and statistics help measure trading performance, not just net gains and losses. Tracking trade performance to optimize profitability is key to becoming a good forex trader in the long term.
There are several ways to measure trading performance. Following are the 7 Ways To Measure Your Trading Performance in 2022.
A basic system to assess the amount of capital loss incurred from trade, three types of drawdowns are absolute, maximum, and relative. Absolute drawdown indicates the magnitude of your loss compared to the initial investment. Maximum measures the difference between the highs and lows of an account balance. Relative shows the maximum drawdown in percentage.
2. Profit Factor
It calculates gross profit and loss by taking the total of your winning trade and dividing it by the gross losing trades to determine your profitability. It is a popular method to measure performance because your money is relative to how much you lose on your trades.
3. Average Win Size Vs. Average Loss Size
It is a ratio of the average profit expected compared to the average loss per trade. For example, if a trader expects a profit of $100 per trade and makes a loss of $50, the profit/loss ratio will be 2:1 ($100/$50). Ideally, it is better to keep the profit/loss ratio at 2:1 or higher so that potential profits will be at least double the potential losses.
4. Sharpe Ratio
It measures the risk associated with a trading strategy. The higher the ratio, the higher the return a trader can expect on the risk taken. A figure lower than one suggests they take too much trouble compared to the expected return.
5. The 2% Method
It is the method of sticking to a percentage you are willing to risk per trade to avert excessive drawdowns. The two percentages is a commonly used margin.
This is a risk-to-reward ratio where ‘2R’ means the reward is double the risk. For example, you risk $10 for a potential profit of $20 on a trade.
7. Win Percentage
The win/loss ratio will indicate how many trades you have won compared to losses. If out of 10 trades, you end up winning 5, you have a win ratio of 50 percent. It is usual for profitable traders to have a less than 50 percent win ratio.
Naturally, you want to win more often than you lose. Successful traders often achieve profits consistently through winning trades, but you cannot rule out losses. Tracking trading activity helps you assess market conditions before any trade and evaluate when is the best time to open or exit a position. This process enables you to gain more experience in forex trading and enhances your ability to maximize profits.