How to Grade Your Performance

A person who trades without measuring and grading his performance is like someone who calls himself a competitive runner but does not own a stopwatch. Only a recreational runner can jog around the block without a stopwatch, to get some exercise and enjoy the scenery. A person who claims to be a competitive runner but has no stopwatch and keeps no records is a joker.

How to Grade Your Performance

Imagine two friends taking a college course. Both have similar abilities and backgrounds, but one takes a test each week, while the other waits for the final. All other factors being equal, which of them is likely to get a higher grade on the exam? The one who waited or the one who took weekly tests?

Most educational systems test students at regular intervals. Testing prompts people to fill the gaps in their knowledge. Students who take tests throughout the year tend to do better on their finals. Frequent tests help improve performance.

The markets keep testing us, only most traders don’t bother to look up their grades. They gloat over profits or trash confirmation slips for losing trades. Neither bragging nor beating yourself up makes you a better trader.

The market grades every trade and posts results on a wall, only most traders have no clue where to look. Some count money, but that’s a very crude measure, which does not compare performance in different markets at different prices. You may take more money from a sloppy trade in a big expensive market than from an elegant entry and exit in a difficult narrow market. Which of them reveals a higher level of skill? Money is important but it doesn’t always provide the best measure of success.

From Come into My Trading Room, by Dr. Alexander Elder,
John Wiley & Sons, Inc., 2002

There is no “recreational trading” in the markets. There is competitive trading and there is losing, and not much else in between. If you are serious about winning—and if you aren’t you shouldn’t be in the markets—you must get yourself a stopwatch before you run another lap.

There are many ways to measure performance. I suggest grading your trades on three scales: your buy grade, your sell grade, and—most importantly—the overall trade grade.

No comments: