Improve Day Trade Performance by Sorting Winners and Losers

Monday, September 22, 2008

Every daytrader is looking to improve performance. Some are discretionary traders while others use a systematic approach. Both can use some analysis to improve their trading results.

Optimizing trade performance starts with analyzing past trade data.It is very important to track every trade and its characteristics. After building a database the analysis can begin. The first step is to sort the trades. An important first sort is by winning and losing trades. Winners and losers share characteristics and careful analysis will unlock better overall system performance.

Two prominent characteristics of winning trades are time and price. One of the most important goals after a trade has been executed is defining it’’s likely outcome. Sorting previous trades can help accomplish this goal. Isolate all the winning trades and sort by length of time in the trade until closeout. Find the average time in the trade. Compare that number to the same calculation with the losing trades. The winners have a longer average time than the losers. Losers will tend to be quick.

It seems like this piece of information is minor. But, it can be a powerful tool to the daytrader. If you delve deeper into the data in excel you can isolate a time frame that defines when only winners survive. Create a histogram that gives the winning probability by elapsed time in the trade.

Using this piece of information can improve your performance in a couple of ways. Consider different trade entry rules that don”t commit your entire capital on the initial signal. Use simple time checkins to add size to your trade to reach your optimal trade size. It can be a simple as buying every five minutes as long as the trade is alive. By staggering the entry, the quick losing trades will automatically have lower size than your long winning trades. The average winner will improve as the average loser will decrease. This lowers the overall drawdown potential . It will also raise your expected return.

An old trading maxim is to cut winners short and let winners run. Knowing your time performance data helps accomplish this goal. If you track the PL of your trades on every bar, it leads to another discovery. Graph the results and look at the chart. The winning trades not only last longer but have an upward slope. The losers will have a downward slope. Employing a trailing stop will cut the losers off but allow the winners to run by having a trailing stop below the winning slope.

Analyzing past trades is the key to improving results.