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Checking Your Performance

How good a trader are you? Everyone eventually must ask and answer this question. The answer may be unpleasant, but sooner or later you have to face your limitations. Some traders feed their accounts every month to avoid looking at how poorly they are doing. It's natural to take such measures. We all want to be successful, and it can be devastating to discover that, despite our best efforts, we just aren't trading up to par.

Yes, it takes time to hone your trading skills, but if you are losing money every month you must be doing something wrong. Why not change to doing something right, and start taking home huge profits?

It is vital to monitor your trading performance on a trade-by-trade basis. Keep a trading diary. Record the setup, your trading plan, and how confident you felt about your plan. And more important, it is useful to keep track of your dollar-based win-loss ratio. There are many ratios that you could use to gauge your performance, but a win-loss ratio based on dollar amounts is a useful marker of performance.

It's simple to calculate if you keep records. Always record the dollars won or lost on each trade, then divide the dollars won by the dollars lost. (You could use a simple win-loss ratio comparing winning trades to losing trades, but if you ignore the dollar amounts, it's possible to obtain a reasonable win-loss ratio, but still mount substantial losses.)

If your dollar-based win-loss ratio is 100% or lower, you are bound to blow out your account over time. In order to survive, you must increase the ratio. Seasoned traders tend to have a ratio of 200% (in other words, for every dollar they lose, they win $2). Some professionals have a ratio of 400%.

Why do some traders have low win-loss ratios? One of the reasons is that they don't look at the potential risk before they make a trade. They take setups that are overly risky and unlikely to produce a profit.

Rather than take the trade, they would be better off waiting for a better trading opportunity, a trade setup that potentially could provide larger profits and little risk. It's not easy. It takes patience, and a strong commitment to study the markets and identify good setups.

But in the end, it's worth it. If you carefully select high probability setups, you'll trade more profitably and you'll be more satisfied with your performance. Suddenly, you'll find that you'll get on a roll and your profits will increase greatly over time. By carefully monitoring your performance and managing your risk, you'll see your profits reach new highs.

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Sunday, 14 July 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.