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Not really a response to this, but how about the performance metric of profit as a function of risk? In other words, I made $1000 today, but my risk assumed was $2000. Not as preferable as making $800 but risking only $400, from a risk management perspective.
This one is kind of hard to quantify depending on how one trades. For example, not everyone uses a true fixed stop on each trade. I have a disaster stop (for me about 6-8 ES points, 24-32 ticks), but I want to see how the market responds when I enter a trade, so I do not always have a quantified risk every time. Thus, the lines become blurry. However, in general, I think it's a good metric to keep track of.
Van Tharp calls these R-multiples. If I risk 8 ticks and make 4, my profit is 1/2 my risk, or 0.5R. If I have another where I risk 20 and make 50, my profit is 2.5R, for an average of 1.5R. If I have a loss of -1R, then the average for all three goes to 0.66R. So, after a large enough sample, I get an idea of how much I can expect (expectancy) to make on any given trade, based on how much I risk. Again, it's a bit murky but can be useful.
I like your idea of profit versus drawdown. I suppose you are measuring open, unrealized drawdown, not just closed losses? In other words, if I have a trade that goes against me 50 ticks and then I close it at breakeven, my drawdown was still -50 ticks. That would be the only reasonable way to calculate it, as the brokers care about unrealized losses just as much as they do closed losses
Is anyone else keeping up with this stat? Please post here, or PM me regarding this if you're a profitable trader and keep up with this, or if you have any insight into this stat at all!
I am CLUELESS as to whether these results are awful or great. Intuitively I put a "benchmark" at 1:1 as this seems like a good level to be over. Should I be over 1:1 more consistently? That's what I really want to know.
Looking forward to hearing from ya'll.
I’m not sure what this chart represents… kind of looks like profit/loss factor. How you trade by varying contracts, stops, targets….. It looks like it might be difficult to find a really good measure, other than what you are already tracking by tick profit and tick drawdown.
I looked at this a Long time ago and I think I used to track a lot of what you are looking at today. But over time, as I changed how I trade to fit the risk/reward profile that makes me comfortable, I found that I couldn’t use the canned reports from trading software.
I am very risk averse, so I use an initial stoploss that varies by symbol, trade 3 contracts all in, first profit target to insure minimal losses (to improve my win/loss ratio) and second profit target set to try to gain a 3:1 profit/loss factor or more. Most systems track 2 profit targets as 2 trades and I wanted to track 2 profit targets as 1 trade. So I track everything by hand in a spreadsheet.
A couple of times a year I look at:
profit/loss factor
want minimum 3:1/symbol
getting about 2.5:1 but varies by symbol
win/loss ratio
want >50%/symbol
getting about 62% but varies by symbol
Every couple of months, I look at:
Profit by symbol (11 symbols, may be another 2 next year)
Profit by day of week (Monday through Friday)
Profit by setup (pullback, consolidation, reversal and support/resistance break)
Profit by entry time (covers 8 hours daily)
I'm not consistently profitable, but I follow this kind of metrics for myself. I think that there are of the utmost importance, since linked to risk management. I use the "on the table" image:
1) By trade (on average)
This one is close to @josh or Van Tharpe.
Let's say that my "normal" S/L is 10 ticks and my average profit per trade (all together, winners+losers) is 2 ticks (figures just for illustration).
It means that, in average, each time I put 10 "on the table", I get back 10+2.
2) By day
This one is similar to the previous, but at the scale of a day.
Let's suppose that my MIDD was -50 ticks and that my profit at the end of the day was 25 ticks.
It means that, at a moment during this day, I had 50 ticks on the table. And I finished with 25 ticks.
Well, beautiful trades (all three so far), but allllll three have had half the position stopped out for small loss/brekeven before the big moves. I'm still happy, but I could have over double the profits at this point that I have. (Greedy!)
So does Van Tharp mention any kind of benchmark or something to shoot for? Does he say something to the effect of where the top traders R-multiples are? Again, intuitively, the 1:1 seems like something good to be over.
Can you/others think of pros/cons to using r-multiple vs what I proposed? (daily p/l : max drawdown for that day).
I'm really been searching for the best metric to measure risk-adjusted performance. Secondly, I want to have some type of benchmark to gauge my risk-adjusted performance.
Maybe I should just be happy making ticks, ticks, ticks. I don't know.
I don't think there is any single universal measure of risk for you to measure risk-adjusted performance by. Many use Sharpe ratio or Sortino ratio but each has its drawbacks. Different types of risks matter to different degrees for every trader/investor. Gross profit/gross losses, volatility, downward volatility, max drawdown, avg dd, avg time to recover, VaR over a specific time period, risk of ruin, etc. all measure different aspects of risk and are all valid measures of risk.
My view is that you should look at what matters to you personally and construct your own risk metric(s). This leaves open the issue of risk-adjusted performance comparisons, but you can either set arbitrary benchmarks ("I want 5% additional CAGR for every extra 1% of max drawdown") or compare to buy & hold/simple mechanical strategies.
I no longer have that book, so I don't remember, but it will obviously depend on you. A 0.1R over a large number of trades (think HFT) is fantastic. Maybe not so much for a very small number, since there is less opportunity, where you will probably want a 2.0R, for example.
An R-multiple gives you how much you were WILLING to risk. Your calculation gives you how much risk you actually realized. They measure similar metrics, but one is theoretically what you were willing to give up, and the other is what you actually did.
I'm glad you are discussing risk-adjusted performance. Today I have made almost to the dollar what I did yesterday, but I had to go 5 deep to do it, whereas yesterday my max cars in any one trade was 3, with most of them being 2 lotters. This is also probably a good thing to track--what's the max leverage used (max number of contracts in a trade)? Finally, the dollars per contract traded. Using the above example, today I have one trade, making +2.1 per contract traded. Yesterday it took me 9 trades, and about +0.5 per contract traded. Which is the better day? Well, today I incurred more risk, but also let my profits run longer. Yesterday, less risk but also smaller profits per trade (though the caveat is that yesterday was much more balance and range bound than today, with fewer directional moves than today).
I agree with ImPairsonator.... you should develop your own risk metrics. Your original idea of ticks made vs ticks drawdown may give you what you need right now. In addition, its very difficult to set arbitrary benchmarks without enough trading data to give you an idea what is possible in realtime.
Also I think a big deal is that R is on a trade by trade basis. The performance ratio I brought up is a cumulative daily metric, so that is the biggest difference to me.
I think if we execute our plans... what we are willing to risk, often ends up being realized risk. So they are probably about the same over enough of a sample size.
Yes, the metric I've heard CTA's talk about using to measure risk based on how many contracts you're using... comes down to MTE or Margin to Equity ratio. The more contracts you trade, the more margin you use in relation to your account equity. From what I've read, that is the most true indicator of examining future risk/volatility one might have. Fund of funds and CPO's use this to evaluate riskiness of a manager.
That's ultimately what the best trader can do (what you've done over the past few days) is use risk to their advantage. It's about understanding risk, understanding what environment you're in, and controlling risk it's not always about minimizing risk, and that's a big point.
Maybe I'll keep up with both, and just see how it goes.
