Steps To Evaluate Your Trading Activity

December 18, 2024 at 08:35 AM EST

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By Kyle Anthony, Benzinga

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The adage, ‘You don’t rise to the occasion; you revert to your process,’ encapsulates the nature of humans during intense periods. We fall back on the habits, skills, and routines established and honed through consistent training. Hence, it is essential to have an established plan of action when approaching any high-intensity endeavor like trading.

The mental acuity involved in trading makes it a high-intensity activity that requires individuals to have a process to achieve their goals, and many falter. Some 85% of day traders quit within three years, with 97% losing money in less than a year. How does one evaluate their trading process to ensure it remains optimal over time? Answering this question is multifaceted. This article will expound on several ways traders can evaluate and optimize their trading process for success.

A Qualitative Approach – Reviewing Each Trade For Insights

Evaluating one’s trade process can be done through progressive inquiry and analysis, with the goal of identifying the impetus for each action and understanding why it was taken. The purpose of doing this is to check in with oneself about how one is proceeding with one's current trading activity and whether it aligns with one's investment ethos. Below are some questions that can be used to retrospectively analyze how well your trading process is working. It’s a good idea to analyze your trades frequently.

The initial question to ask oneself is, was my trading idea in line with or supported by facts and market trends?

This question is pivotal and speaks to idea generation and understanding the market. The goal is to gauge one’s certainty and knowledge of the market drivers that will ultimately influence the trade's success.

What was my level of conviction?

After affirming one's market knowledge, the next step is determining one's conviction in this trade. After assessing the market landscape and identifying the various variables, how much risk did I undertake, and was the return commensurate? Did I take the time to ensure I fully believed in the trade based on market conditions, or was I nervous going into it? Asking this helps to establish the opportunity cost of the trade and how much belief one indeed had in it, which is especially helpful when profits don’t meet expectations.

Was the timing right? Did the trade need to occur now, or was it repeatable?

As they say, timing is everything. Understanding whether the trade was opportunistic or cyclical is essential. In the former, understanding the immediacy of why one took action is necessary. Could one have waited for a better entry point, or was the trade too far gone? These are questions that arise through this thought process. In the case of the latter, understanding whether it is worthwhile pursuing it at the current time allows for scope and scale to be determined, meaning how long such a trade can run for and how much I can capitalize on it.

Was I disciplined in my execution?

This question speaks to the heart of the matter; how vigilant and diligent was my execution of the trade? Did I ensure that the market variables that supported the trade remained present as time progressed? Or did I exit too early? While the profit (or loss) may be the true answer to this question, taking a moment to reverse engineer the steps and thinking that led to the outcome is beneficial.

A Quantitative, Macro Approach

A quantitative approach to evaluating one’s trading process puts into context the success of one’s strategy. For individuals who choose to utilize this approach, various statistical measures can be used to gauge the effectiveness of one’s trading efficacy. Top of mind, profitability is the most critical metric and can be calculated by subtracting losses from grains, including trading fees. For a more contextual evaluation, calculating ratios, such as Win Rate and Risk-Reward Ratio, provide insight into a trader’s overall success and risk profile. The former is calculated by dividing the winning trades by total trades. A high win rate indicates consistency. The latter is calculated by comparing the potential gains to potential losses. A ratio of two-to-one or higher is generally a good indicator.

An essential and informative metric to use is Return on Investment (ROI). Expressed as net profit as a percentage of the initial capital invested, this provides an overarching indicator of one’s success, helping to objectively frame the overall efficiency of one’s trading activity.

A Goals-Based Approach

Though the baseline intention of trading is to be profitable, there are typically goals or milestones associated with those monies. Understanding how close one is to achieving one's goals via trading is important, as it will help calibrate one’s trading activity accordingly. For goal-oriented traders, combining qualitative and quantitative approaches helps create a pathway to success. Qualitative actions such as trade journaling keep a record of one intended goal and the actions that will bring it to fruition. From a quantitative standpoint, writing down the trading strategies one will utilize to achieve said goal and back-testing and/or forward-testing them to understand their success rate is also an effective action.

Utilizing Resources To Learn And Enhance One’s Trading Process

The growth and affordability of online investment platforms have made trading increasingly accessible; as such, knowing one’s role within this landscape is especially important.

Plus500 (OTC: PLSQF) is a multi-asset fintech group operating trading platforms globally. Established in 2008, the firm has grown in importance as a player in the financial trading sector, being listed on the London Stock Exchange under the ticker symbol PLUS and included in the FTSE 250 Index.

As a trading platform, Plus500 is designed to be straightforward and accessible for beginners, who can use the demo account and the Trading Academy to gain experience before trading while offering advanced features for experienced traders. Traders can start with as little as $100, and Plus500 Futures (U.S.) offers a deposit bonus of up to $200.

The firm also has an educational platform, Future Trading Academy, that allows both beginning and professional traders to familiarize themselves with foundational knowledge on futures or learn about new developments within the investment landscape. The Future Trading Academy provides fulsome resources, equipping investors with the ability to navigate the complexities of futures trading effectively. Those interested in learning more about optimizing their trades through analysis may want to check out the platform and all the resources on offer.

Trading with leverage comes with a high risk and may not be suitable for everyone.

Maintaining Focus With One’s Trading Activity

Trading requires continuous focus and vigilance; as such, routinely evaluating one’s trading activity creates an opportunity to level-set and assess the efficacy of one’s thought process. Making a profit is paramount for high-activity traders; however, success is not the only possible outcome when trading, and how it is done is key to achieving that goal. As such, taking time to evaluate one’s trading activity will help to illuminate blind spots and crystalize the areas that are resolute.

Featured photo by Campaign Creators on Unsplash.

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