Let’s face it, most traders struggle to make money. Sure, they might have a nice winner once in a while, but overall, they are either losing money or maybe break even at best. It’s estimated that 90% of all traders are just losing money (link to pdf) in the long run. While there are many possible reasons why traders are losing money, one of the major factors is that they are not analyzing their trading performance using the correct trade metrics. In fact, most traders are not analyzing their trading performance at all. In this article, we will explore the top 17 trading metrics and why you should consider using them. Note there are plenty of more metrics you could look at, like the payoff ratio mentioned here. But I believe the following top 17 metrics are all you need.
So, what are the top 17 trading metrics you should use in your trading?
- Net profit
- Profit factor
- Win ratio
- Average winner
- Average loser
- Holding time
- Expected Value
- Biggest winner
- Biggest loser
- Max. Drawdown
- Winning Streak
- Losing streak
- Risk reward
- Avg. MFA
- Avg. MFE
- Avg. ETD
We will explain each of these trading metrics in the following paragraphs. But first, let’s look at what trading metrics are and why you need to use them.
What are the Trading Metrics?
Trading metrics are just statistics we use to analyze our trading performance. Just like you can analyze a car on different aspects like how fast it can drive, how many people it can carry, or what the driving range is, these metrics will tell you all kinds of different aspects about your trading. For example, like how your how trading strategy performs, how robust your it is, and if it will survive in different market conditions. We use these metrics to get a better understanding of your performance and to gain confidence if it’s profitable in the long run.
Trading metrics are based on the historical data of all your trades. The more historical trades you use, the more accurate the statistics will become. You can imagine that statistics based over 300 trades provide much more detailed and accurate information then when you base them over just 5 trades. In general, we recommend that you gather statistics based on at least 100 trades which span at least 6 trading months.
At first glance, all these metrics can seem like rocket science when you are new to trading. However, luckily most trading journals, like our own ‘Improve your trade journal, will do all the heavy lifting for you and present the metrics and statistics in easy to understand reports. That way you don’t need to worry about calculating all these metrics yourself. Instead, you can just focus on analyzing the reports and find areas in which you can improve easily.
Why Should You Use Them?
Let look at how most traders start their trading career. And note that includes me! I made the following mistake for years until I started using trading metrics to analyze my trading strategy.
Most traders start out with a trading strategy they found somewhere and which looks very promising. They start trading the strategy for a while and might even have some initial success with it. But sooner or later they get a couple of losers and that’s when they start doubting their new strategy. The initial success is quickly forgotten and they traders start thinking about ways to avoid those losers they experienced. Some just start randomly changing the strategy in some form or shape hoping this will avoid the losers. Other traders don’t even bother and go out on the internet to find the next holy grail strategy.
From here they again start trading their new/changed strategy and the cycle repeats. Sooner or later they get in a losing streak and doubt/fear starts to get in their mind and so they change the strategy again or go out searching for another strategy.
This strategy hopping is what most traders do. They didn’t build up any confidence in their strategy and so they abandon it the moment they experience a few losers.
What traders should realize is that losers are part of life and part of trading. No matter which strategy you use, there will be a period where you are going to experience a losing streak. That is why you cannot judge a strategy based on only a handful of trades.
So how to gain confidence in your trading strategy? By (manual) backtesting your strategy and gathering the trade metrics for at least 100 trades and preferably 6 months of historical data. This will cost you nothing except some time and effort but it will give you invaluable information and the confidence that your strategy works.
They will tell you what you how many losers in a row you can expect and what your average or max. loser will be. Having these numbers will make a big difference in your trading. Why would you start searching for a new strategy (for which you don’t have any statistics) when you know your current trading strategy has proven to be profitable over at least 100 trades, and that you’re just experiencing a drawdown period which is perfectly normal based on your trading metrics
This is probably the biggest reason why you should use trading metrics. To get the confidence that your strategy works and to be able to stick with it when you encounter the inevitable losing streak.
But when you are a profitable trader the trading metrics will give you valuable information where and how you could improve your trading performance. Note that now you are making (small) changes based on statistics. Not on fear or intuition like losing traders are doing. Again, you backtest these changes for at least 100 trades to get your new trading metrics & performance. This will verify if the changes you made actually improved your trading performance or not.
The Top 17 Trading Metrics
Now that we have a clear understanding of what trading metrics are and why you would want to use them, let’s look at the top 17 metrics.
1. Net Profit
Net profit is probably everybody’s favorite trading metric. The net profit is just the amount of money you made after deducting all the trading commissions/fees and other expenses. A negative net profit means we’re losing money and a positive net profit means we’re earning money. It goes without saying that traders are always searching for ways to increase their net profit. However net profit is probably not the best metric to use since it does not say anything about time and volume.
For example, let’s compare the following two traders.
- Trader #1 has a net profit of $10k after 2 weeks of trading.
- Trader #2 has a net profit of $40k after 6 months of trading.
Who’s the winner here?
By just looking at the net profit you might say that trader 2 is doing better. However, if we include the time it took to make this profit then clearly trader #1 is the winner here.
Now let’s look at another example:
- Trader #1 has a net profit of $10k after 4 weeks of trading.
- Trader #2 has a net profit of $10k after 4 weeks of trading.
Who’s the winner now?
you might say that both traders are equally good. But what if we say that trader #1 started with $10k of capital and trader #2 started with $20k of capital? Now we see that trader #1 doubled his account and had a 100% capital gain while trader #2 made ‘just’ a 50% capital gain.
While we do like to monitor our net profit since it tells us if we are winning or losing, we can clearly see it’s not the only thing we should look at.
2. Profit Factor
The profit factor measures the amount of money made against the money lost while trading. It measures whether the overall outcome of trades is profitable. It is normal to incur losses in the course of trading as well as make profits. The way to measure the profit factor is to divide the total winnings against the sum of all the losses. The profit factor will tell you the real results of your efforts when trading.
Profit factor = (gross profits) / (gross loss)
The ideal profit factor should be more than one. Anything below one is considered as a poor performance. There is a grading system for the profit factor to help traders know the performance of their trades. It can be easy to assume your trades are doing well when you rake in immense profits from one trade and multiple losses from other trades.
|Below 1||Bad||Trader is losing money|
|1.0||Bad||Trader is breakeven, but still losing money when taking commissions an fees into account|
|1.10-1.140||Average||Trader is making money but his strategy is not very robust and small changes in the market volatility might have a huge impact on this trading strategy|
|1.41 -2.0||Good||Trader is profitable and can withstand small changes in the market|
|Above 2.0||Excellent||Very few traders manage to get a profit factor of 2 or more for a long time.|
A factor of 1.0 and below is a poor performance. The range of 1.10-1.40 is average performance, while 1.41-2.0 is an excellent performance for trades. Any profit factor that is 2.1 and above shows that your trades have outstanding performance.
The profit factor is a good indicator of when a trader needs to change or improve their trading strategy. It is simple to calculate, and you can do it regularly to see your daily performance. You can analyze trades that that has a high-profit factor. You will be able to identify the trades that had a lot of profit and try to replicate it. The same is true for the losers. Analyze those and see how/if you can avoid any trades with a profit factor below 1
3. Win Ratio
The win ratio is an essential metric. The ratio represents the ratio of winners vs losers. Calculating the win ratio takes the number of profitable trades divided by the total number of trades
Winratio = number of winning trades / (number of winning traders + number of losing traders) * 100.0 %
Most beginning traders make the mistake to think that the win ratio should be above 50% to make money. While it might sound logical that you can only make money if you have more winners then losers this is actually not true. If your winners are making much more money than your losers then you can still make money with a relatively low win ratio
Example. let’s suppose your winners are making $100 profit and your losers are costing you -$20
Your win ratio should then be at least 16.7% to break even since one $100 winner will compensate for five $20 losers.
So always look at your average risk/reward when looking at your win ratio.
4. Average Winner
The average winner shows you the average amount that you win per winning trade. The average winner is calculated by dividing the total amount of profit made by all winning trades by the number of winning trades.
Average winner = (total profit made by all winners) / (number of winning trades)
The average winner and average loser metrics are used to calculate the expected value and expectancy. Besides they give us an indication of how much an impact a loser might have. For example, if your average loser is 3x your average winner then that means that a single loser will wipe out the profits of 3 winners. That again would require that your win rate is high enough and that you have 3x more winners than losers. This could be perfectly fine if you use a scalping based strategy but would be horrible for a swing strategy.
5. Average Loser
The average loser shows you the average amount that you lose per losing trade. You can determine the average loser by dividing the sum amount of all the losses by the number of losing trades.
Average winner = (total loss from by all losers) / (number of losing trades)
Again the average loser and average winner will tell us how much impact a single loser might have and both are used in the calculation or the expectancy and expected value. In general, we want the average loser to be as low as possible and the average win as high as possible. Note though that exceptions exists e.g. when using a scalping strategy.
6. Holding Time
The holding time is the average time you are in a trade. It’s important to traders since your capital is ‘locked’ during the time of the trade and cannot be used for other trades. This might be less relevant if you are a day trader and your trades only last a few minutes. But if you are a swing trader which has trades which can take weeks or months then the holding time becomes an important factor.
When your capital is locked in a trade, then you cannot use that capital for other trades that might come along. That way it limits the number of trades you can take simultaneously. As we saw in the explanation of the net profit this could mean that your net profit is limited just because you’re holding time is too long.
Besides limiting your potential net profit there’s another risk of long holding times. The market often reacts violently when important news, or earning reports get released or disasters happen. When you are in a trade during these events your trade might go against you and stop you out. That is why many traders won’t open new trades just before or during important news events. But note you cannot always predict these events. Some disasters might happen, trump might suddenly tweet to boycott china or a new war may be started in the middle east. All unforeseen events which could impact your trade.
7. Expected Value
The expected value shows you the average amount you might earn (or lose) on a trade. It’s a very important metric since it takes into account your average winner, average loser, and win rate.
The formula for determining the expected value is as follows:
EV= (Percentage Wins x Average Wins) – (Percentage of loss x Average Loss
The expected value is another metric that will show you if your strategy is profitable or not. But besides this, you can use the expected value as a first take-profit target since most of your trades should at least be able to reach this, based on the statistics.
The expectation can be used to determine how robust a trading strategy is. We already the expected value which is the average amount we can expect per trade. The expectation takes this value and divides it by the average loss:
Expectation = (Expected value) / (Average loss)
By dividing the expected value by the average loss we get a number which indicates how robust your strategy is When the result is between 0-0.4, it shows that an investment will probably have a negative return. A of 0.5 is okay, while a result of 0.6 and above is a healthy positive return.
|0.0-0.4||Strategy will probably be losing|
|0.5||Strategy is OK, but we should monitor our losses to make sure the average does not significantly change (get greater)|
|>0.5||Robust profitable strategy|
The expectation metric generally determines whether the expected value has a high or low risk. The changes in the markets cannot be predicted 100%. Therefore, a strategy may have a positive expected value, but it cannot positively return in the worst-case scenario. Measuring the expectancy of trade against the possibility of a loss will tell a trader how safe his strategy will be. Traders must find trades that have positive yields even when there is a little turbulence in the economy. Even though the expectation doesn’t confirm that trade is 100% safe, it is a good measure to determine the safest trades available. It is an excellent way to ensure that you only make trades with high returns during the ideal economic conditions.
9. Biggest Winner
The biggest winner is the trade that contributes to a significant portion of the net profits. Sometimes, a trader can make single trades that can have very big returns that affect the trader’s overall net profit. While big winners are very nice, we should be aware that they are outliers. Most trades will not be big winners, that’s why we use the average winner in most calculations.
But the biggest winners could influence our statistics a lot and they could result from just pure luck. Suppose our average winner is $100 and or the biggest winner is $4000 then that one big winner is the same as 40 average winners!! Since that 1 big winner made such a huge impact, we might want to see what our results are if we did not have this big winner. Is our strategy still profitable without it? Or does our entire strategy rely on those big winners to make money? Most trading journals will allow you to filter out the biggest winners (or losers) to see how they affect our trading performance.
Removing the biggest winner will show the actual average wins of your trades. It will help you see whether your trades had low ROI and how you can improve it.
10. Biggest Loser
Like the biggest winner, the biggest loser can provide a false performance of an account. A single substantial loss from the trade can make it seem like a trader has a high average loss in trades. It is essential to also look at your statistics when you have removed the biggest loser.
The biggest loser tells a story of the risk profile the trader s using. If your biggest loser is much higher than your average losers then you might want to look at the risk exposure you are taking. Cutting losers short and letting winners run is a common phrase in trading, but it works. So while we cannot prevent losers, you can try to limit your biggest losers so it doesn’t become orders of magnitudes bigger then your average loser.
11. Max. Drawdown
The maximum drawdown is my favorite metric. Why since it tells me how much I could lose of my capital when trading my strategy. Remember that losing is part of the game, just as winning. But what’s beautiful about the max. drawdown is that it will tell you what you can expect to lose before you start making money again.
The maximum drawdown is the highest difference between your peak capital and the trough low. The troughs show how the price of your trades dipped below the original capital.
The formula for determining maximum drawdown is:
max drawdown = (Capital Peak High-Capital Trough Low)/ Capital Peak High
By knowing your max. drawdown you know what you can expect to lose. And if you know its pretty normal for your strategy to have a max. drawdown of 15% then you don’t worry when you’re down -10%. You just keep on trading and according to the statistics, the probability of you starting to making money again soon will be very high. Of course, you should trade your strategy like normal. If you make changes, even small ones, then you are getting into unknown territories and the statistics you build up don’t count anymore.
Some traders choose to switch to sim when their drawdown comes under a certain moving average and move back to live trading when the capital goes above the moving average again. We’ll discuss this equity-based trading plan in a future post.
12. Winning Streak
A winning streak is identified by the highest number of subsequent wins. Winning streaks are just part of the game but can be dangerous. That’s why it its important to realize they exist and to know the winning streak of your strategy.
Humans are funny creatures. After a few winners, we get very confident. We think we got this, we’re on a roll and finally, we read the market perfectly and are the best trader out there. In reality, we’re just in a winning streak which can end any time and abrupt. Now suppose you don’t realize this and don’t know your winning streak. Greed comes in and you might be tempted to increase your position size, take setups that did not really fit your strategy, overtrade. And of course the moment you do that you get a big loss.
Stick to your strategy and trading strategy during winning streaks. By knowing your winning streak, you know that the chance you get a loser next time increases.
13. Losing Streak
Just as winning streaks you will encounter losing streaks as well. While winning streaks can make a trader overconfident, we see the opposite during losing streaks. During a losing streak, the trader will get multiple losers in a row. If you don’t have rock-solid confidence in your trading strategy and know your potential losing streak then it’s easy to become afraid and stop trading the strategy. When you experience a losing streak after a winning streak, it can be hard to stop yourself from taking more risks to recover your losses or vice versa reduce your risk to prevent extra losers. In general, the same advice is given here. If you know what your losing streak is then simply sticking to your strategy. Sit it out and know that the chance the next trade will be a winner just increases every time
Now although you should never deviate from your trading plan just because you are in a temporary losing streak it’s always a good idea to continuously monitor your strategy and test out small changes.
With testing out small changes we mean backtesting them, gathering enough metrics for the changed strategy, and if they are positive (and only then) consider applying those changes to your live trading strategy.
14. Risk Reward
The risk-reward metric helps you to determine the return you will get from a particular risk. Most traders’ ideal risk-reward is 1:3 as it has a high return ratio but not very risky. The ratio means that you will earn $3 for every $1 that you invest in a trade. The risk ratio can be as high as 1:7. Note that normally the higher your risk/reward ratio the lower your win ratio will be and vice versa. For example, scalpers will generally use a risk-reward ratio of 1:0.5 but have a win ratio of 80% or more, while swing traders might have a risk-reward ratio of 1:3 but a win ratio of 35%.
As we mentioned before the risk-reward alone does not tell us anything. We should always look at it in combination with the win rate.
The risk-reward and win rate are also dependent on your own character. Some traders just hate losing and they cannot cope with that very well. Those traders will tend to choose a strategy that has a high win rate and thus a lower risk/reward ratio.
Other traders like having those big winners once in a while and don’t might all those the small losers in between. Those traders will naturally favor for a high risk/reward and lower win rate strategy.
Having both a high risk/reward and a high win rate sounds like the holy grail, and it is. Although traders should always try to improve their trading performance, they should avoid into getting into an Indiana Jones adventure to search for the holy grail 😊
|Risk:Reward||Winrate % needed|
15. Avg. MFA
MFA stands for Maximum Adverse Excursion. It may sound difficult but its actually very easy. The MFA is defined as
MFA= worst price trade reached – entry price
and indicates the maximum loss that you could experience. The average MFA is just the average maximum loss for all your trades. Understanding your average MFA can tell you if your stop placement is good or not. When the MFA is less than your stop loss then your stop loss is too big. Note that this is on average so make sure to have a bit of margin here.
So, let’s say your average MFA is $100 and you use a $200 stop loss, then your stop-loss is too big and you could consider it moving it to $150 x since on average the trade won’t go against you for more than $100
On the other hand. When the MFA is very close to your stop loss then your stop loss might be too tight. By using a slightly bigger stop loss you might survive the normal volatility in the market and have a winning instead of losing trade.
16. Avg. MFE
MFE stands for Maximum Favorable Excursion. It’s the opposite of the MAE and shows you the average amount of profit you could have made on your trades. Its formula is
MFE = best price trade reached – entry price
The average MFE is just the average of MFE of all your trades. You use the MFE to see if your exits are correct or not. If your MFE is bigger then your average winner then that means that you are leaving money on the table and that you probably close your trades too soon. Consider what would happen if you exit your trades a bit later for a better price. On the other hand, if your average MFE is very close to your average winner then your exits are very good.
Understanding the maximum profit, you can make in trades can help you determine the right time to exit your trades.
As you can imagine the average MFA and MFE go hand-in-hand because one indicates profit and the other loss. You can see both metrics and all others in most trading journals. But our improve your trade journal will also show you your actual vs optimal performance. For the optimal performance, it uses the MFA and ME
17. Avg. ETD
The ETD indicates how much profit you gave back on average.
ETD = best price trade reached – exit price
It gives a clear indication of how effective your exits are. A small number here is generally desirable since it would imply highly optimized exit conditions that capture most of the price movement you were after.
Enter long at $100
Market price rises to $110 so your MFE is now $110 – $100 = $10 or 10%
Market price declines to $107 and you exit your trade. ETD is now $10 – $7 = $3 or 3%
We know from the ETD that we gave back $3 in potential profit in this particular trade.
Why a trading journal is essential to record your trading metrics
Yes, you could calculate all the trading metrics yourself in a spreadsheet. But that’s just a lot of work and error-prone and not easy to maintain or extend with new things. That’s why most traders use a trading journal application.