How to evaluate your performance as a trader?

This post will address the question of how to address performance as a trader and how I go about it in a more quantitative manner. This is by no means the only way to do this but for me this provides a robust and clear standard to evaluate from.

Step 1: Define a Trade

The first step to evaluate and track performance as a trader is to define the trades you are taking. This would be something like Mike Bellafiore's Playbook, or set of trades that you plan to build your business around.

Essentially you are trying to define the parameters in qualitative and quantitative terms that make up the trade. Those that you can repeat over and over. For example, say I have a trade called the Gap n' Fill. This trade mandates the following:

  1. S&P has gapped up more than 20 points.
  2. 5 min range low is breached.
  3. TICK and Tape are in Favor or at least not dissonant with a bearish case.
  4. Enter in short risking swing high target fill of a gap, scale at midpoint of the gap.

That is the trade. This allows you to in clear terms determine what needs to exist for opportunity to be present and in clear terms when you get in and when you get out.

Step 2: Weigh the Trade

After you define what must exist for the trade to be valid, then you must weight the components relative to their significance. Using the Gap n' Fill it would be absurd to say that a breach of a 5 min low from the open is more important for the trade than a gap existing. Thus the gap would have a higher weighting. It could look like this:

Condition 1 - 2 points

Condition 2 - 1 point

Condition 3 - 1 point

This would mean that the most confluent best version of this trade is a 4 point trade and the worst complete betrayal of this trade is a -4 point.

Step 3: Grade the Trade

Now that you have defined the trade, you can grade it against other trades under that setup. If you have a simple set of setups then you can even weigh them against all other trades. I use a tool Notion for my journaling and have built out a database to make this simple.

This is what it looks like:

if(contains(prop("Confluence"), "S&P Gap 20 Pts"), 2, 0) + if(contains(prop("Confluence"), "5min OR Breach"), 1, 0) + if(contains(prop("Confluence"), "Order Flow Supportive"), 1, 0)

If you take into the various ways this can play out you are left with this:

This breaks down Dr. Andrew Menaker's 4 types of trades:

  1. In process trades you make money on.
  2. In process trades you loose money on.
  3. Out of process trades you make money on.
  4. Out of process trades you loose money on.

Step 4: Visualize Performance and Infer

Finally, plot that data on a scatter plot and quickly you can identify where things are going right or wrong.

This is what the above trades would look like:

As you can see... it shows exactly where the clusters of type 1,2,3,4 trades are in each quadrant. Then you can rapidly identify where things are going wrong. Seeing too many type 2 trades? (Quadrant 2) This may mean that your setup is not effective in these market conditions. Too many type 3 trades? (Quadrant IV) this may mean that you just have been lucky recently and your results are not indicative of a true edge.

With a larger sample size, this chart alone lets me rapidly identify where my performance is being derived and where I might be going wrong if I am entering into a drawdown.

This was a simple example and the more complex of a trader you are the more complex this will become. You can calculate average trade grade per week and plot that against weekly P&L on a year by year basis and look for convergence or divergence, etc. The key is building out a way to quantitatively grade your setup in as objective of a manner as you can.