As a follow up to the article published on November 24, 2016 on Scorekeeping which can be found here: Scorekeeping Part I, this week I will cover some additional tips about scorekeeping for your trading business.
If you are feeling a bit overwhelmed by the amount of data you need to truly track and understand your trading business, it's important for you to realize that accurate scorekeeping is a vital part of any successful trading business. Monitoring the equity curve, average wins/losses, average size, etc., are just the beginning of detailed scorekeeping. While it may not be necessary for the average retail trader to delve as deeply into scorekeeping as those on a professional trading desk, it is possible to track even more detailed performance records than covered in the previous article.
What are some additional elements you could track in your trading business?
In order to have a full understanding of your trading business, you may want to consider tracking your trades by the type of trade it represents. Let's compare your retail trading business to a retail store selling different types of products. Many traders consider diversification in trading to contribute to success. Some of these forms of diversification may include:
- Trading different instruments, such as individual stocks as well as major indices and ETFs.
- Trading different markets, such as forex and futures.
- Trading different setups, such as non-directional, earnings plays, and breakout trades.
- Trading different time frames.
Just like a product in any retail store, each type of diversification is a product in your retail trading business. Each of these products is also a potential profit center. When you think about diversifying your trading business, you need to know how each of your products is contributing to your bottom line.
The practice of detailed scorekeeping means each of the metrics discussed in the previous article – Scorekeeping Part I such as the equity curve; the proportion of winning/losing trades, the average size of winners and losers, the variability of returns, etc., are broken down and analyzed for each product in your trading business.
Your trading business is more likely to succeed if you use your strengths instead of your weaknesses.
It is human nature to have strengths and weaknesses in everything we do in life; trading is no different. If you further delve into scorekeeping by breaking down your trading activities in the above manner, you should be able to identify the relative strength and weakness of each product in your trading business' inventory. You will then have a historical database of the trading activity in each area of your business and how it relates to your business as a whole. For example, your earnings plays are not as successful as your non-directional trading, negatively affecting your bottom line. This indicates something about your earnings plays. You may want to shift your trading plan by focusing more on your non-directional trades, which are working, rather than your earnings plays which is a weak product category.
The goal of keeping score is to identify your own trading patterns, and use those patterns to your advantage. By tracking the results of each product in your retail trading business, you can allocate your capital more efficiently. Focus on the products which are working for you. Devote less capital to those that are not as successful. Diversification can work for you if you analyze each product as an individual element and use those results to contribute to your overall trading success.
If you are new to options trading, a veteran trader, or somewhere in between, consider becoming a member of the Capital Discussions community. There are a wide variety of services offered for traders of all levels – mentoring, classes, trading groups, and more. capitaldiscussions.com/join.