The Vital Statistics - Discover Why It’s Critical To Run Your Trading As A Business

If you have ever run a business you will understand the importance of continually analysing its performance and improving on the current position. In order to do this you will need data and information to make decisions.

Trading is very similar. You need access to information to ensure that you monitor your performance and that you are in a state of continuing improvement. In actual fact, going one step further and actually trading as part of a lawfully recognised business that you have registered may also bring several tax advantages but this is out of the scope of this trading article. In this trading article, we are specifically interested in the transfer of analytical skills from a business model to a trading model.

There are a few important statistics that you need to know and you will need to discover through your testing of the system. Knowing these statistics will give you more confidence in your system through bad times and help to control your ego in very good times!!

Reward / Risk Ratio Or ‘R’ Multiple

You need to know how much risk you are taking on for the profits you are making. If you are taking on too much risk then you may have a system that is an ultimate loser. For example, if you risk an average of $200 per trade and your average win is $1000 on company XYZ then your Reward/Risk ratio is 5:1 or in other words your R multiple is 5. On the other hand, you risk the same amount on company ABC and you get an average return of $100, then your Reward/Risk ratio is 1:2 or your R multiple is 1/2.

In the example above, it shows that you are taking on too much risk on company ABC as you are more likely to lose money on average than taking on the same risk position on company XYZ. In this instance, you will be more likely to trade company XYZ.

Number Of Wins And Losses

Another statistic to look at is how many profitable trades as opposed to losing trades did the system produce. If you look at 100 trades and on average, 40 of those are winners, then you have a profitable system approximately 40% of the time. This will be important if you start to doubt the effectiveness of your trading.

Another fact to note is that if, for example, you had an overall profitable trading system but the majority of the profit had been made from only one or two trades then is it possible that this is simply a stroke of luck as opposed to a good system?

For example if you have 20 trades and each one of them gave you $100 loss and then one trade managed to net you $3000, you would have an average profit – but you will then need to look at the system in more detail. It may be possible that you have a very good system but this is a decision that you will need to make.

Types Of Markets

Back testing your trades on a variety of different markets will allow you to test to see if the system favours any particular market or stock over another. This may give you vital information as to the types of markets you should trade and avoid.

A very good book to help get you started on the topic of back-testing and analysing your results is “High Probability Trading” by Marcel Link.

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