Regardless of your level as a trader, I always believe that good record keeping either through a trading journal software or trading spreadsheet is required for anyone that wants to become successful in trading. These tools help you really understand what goes on with your trading performance from a statistical point of view removing all emotions, judgements and ambiguity from your analysis.
In this post, I’d like to share some very basic trading metrics that anyone can track using an excel spreadsheet and are extremely important to measure your success and trading performance.
1. Average pnl per trade
This metrics is so important, yet very few people know how it works. In a nutshell, the avg pnl per trade is the sum of your pnl divided by the number of trades. For example, if your pnl is $500 and you traded 100 times, your avg pnl per trade is $1. What is really important to notice here is whether it is negative or positive. A negative avg means that you need to be trading with the absolute lowest size possible because increasing your position size will increase your losses. Very often, I see traders trading 200-1000 lots with a negative avg pnl. This is a really bad practice that you should avoid until you have a sound strategy.
2. Profit Factor
Also known as risk reward, the profit factor is computed by dividing the sum of your wins by the absolute sum of your losses. For example, if the sum of your wins equals to $1000 and the sum of your losses equals to $2000, your profit factor is 0.5. Anything below 1 means that you are losing money and that you are certainly holding your losers longer than your winners. A profit factor of 1 means that you are breaking even and must improve. A trader should always strive to find trades with a profit factor of 1:3, meaning risking $1 to make $3. Easier said than done, but the point is to never enter a trade where your reward is not at least twice your stop. Someone with a poor profit factor has poor risk management, a crucial skill to long term profitability.
3. Longs and Shorts Pnl
Not widely known, I find this trading metric extremely powerful. Here is how it works. Sum the pnl of all LONG and all SHORT trades. If you make money trading on both sides, you are all set. If you are losing when going long, reduce your positions or stop trading long for a while until you figure out what is going on with your strategy. Ideally, you need to be running this report as often as possible to cut your losses short and recognize recurrent patterns.
Drawdown shows the lowest point your account reached. If you start trading with $10k account and lose $1k, your drawdown is $1k or 10%. A good trader always tries to have the least drawdown possible or at least a consistent one, never breaking a given threshold and always hitting new account highs. If your trading spreadsheet has your account balance, run =MIN(PUTYOURCELLRANGEHERE) or sort your account balance column in ascending order.
5. Win Rate
The win rate is the percentage of positive trades. Some systems use win rates that sums your average wins / average losses, but that might be complicated to compute using excel formulas. The win rate is an important trading metric that allows traders to monitor the efficiency of their strategies. Typically profitable traders have a very consistent win rate without too much fluctuation over a long period of time. If your win rate fluctuates, it means your strategy hasn’t reached maturity and additional improvements must be made. The win rate goes hand in hand with profit factor. You can have a low win rate of 30%, but a high profit factor of 5 and make a killing, however, if your win rate is 50% and your profit factor is 1, you are only breaking even.
These are some of the most important metrics I’d measure with a trading journal spreadsheet besides pnl. Now, if you want the Cadillac of trading metrics and access to other essential trading metrics like avg holding time of losers vs winners, instrument rankings, performance over time and lots more, sign up for our trading journal to discover what is crippling your trading performance.