I have a degree in Mechanical Engineering from Columbia U. Although my days of analyzing control systems and playing with complex math problems are long gone, I still use plenty of those analytical skills to quantify my trading performance.
Seriously, I am so meticulous about my numbers that even Mike, Partner at SMB, thought I was a spy for another firm when I first interviewed at SMB. He thought I was just asking too many detailed questions about performance, risk/ reward on trades, etc.
According to him all those questions only meant I had to have been gathering intel for another prop shop – and there were a lot of them at time trying to play that game just for the record. Actually, I was just being myself, a true number cruncher at heart.
For today’s column I wanted to give you an inside view of how and why I review my trading numbers. Keep in mind that I am a high frequency trader and thus my system requires this kind of analysis, but the same approach towards reviewing your work will serve useful for those not as active. So let’s dig right in.
First, let’s tackle the issue of why it is worth spending the time having a routine to review your work. Though not obvious to most traders, it provides a framework for looking at your work in an unemotional way. Often, we become emotional and overweight the results from any one trade and conclude erroneously whether that is play that must be kept/eliminated from our trading.
Secondly, it gives us the ability to quickly to really see how we make/lose our money. And most importantly, and with the right record keeping, you can tell with excruciating accuracy when the market conditions change and when it is time to shift gears in your trading mentality.
I like to keep track of the following stats that I find useful for my own trading. It has been really more by trial and error that I have come down to this relatively small list – it used to be much bigger. But this list works for me:
• Performance and Volume per time of the day (premarket, open, mid day, close, after hours).
• Max size during the times of the days vs their profitability and percentage of big winners.
• Risk/Reward per trade setup – I have my trades broken down into three categories: A, B and C. A-trades being the ones I have most confidence/size/risk on, and C-trades being the least probable trades that I treat as scalps.
• Profitability per stock and per sector.
• Profitability Longs vs Shorts.
• Profitability per market setup: I want to know how my days is tight up to a trend day, inside day, or just range bound day.
• Profitability per news item: I want to see how my results are for stocks gapping up/down big, stocks with upgrades/downgrades, stocks fresh with earnings (mixed, heavily weighted to one side), secondary offering pricings, etc.
• Average holding time for my different trade categories.
• Liquidity adding percentage per time of the day.
During the weekend I take a couple of hours to go over my results from the week and try to find some patterns. I want to find out if the market conditions have shifted so I know where to spend most of my mental energy in the coming days.
Do I play more C trades and be lighter on my A trades? Do I just load up on my A trades but reduce my price targets to about half of what I usually shoot for? Is my data meaningful or is it littered with emotional/angry trades? If so, then what must I do to correct that mental state? You get the point. The more time you spend on this, the closer you get to knowing who you are as a trader.
Monthly and quarterly I look at my results and update my stock Ban list. These are the stocks that should have a charity named after me, those I just day in and out single handedly donate tons of cash to. Every two quarters I make an effort to give the stock one more shot to come out of the ban list. But normally they are in there for a reason.
In the end what matters is being overly meticulous about your results but only AFTER you have developed the skills to perform day and out. I am at a point in my trading career where I feel I know myself as a trader pretty well and now I am just trying to cut the fat in my trading. Take, for example, a recent analysis I started doing:
I wanted to look further into my trade categories (A, B and C) and do a breakdown on how much I make and lose on each of them. I am trying to figure out if there are some silly losses I could eliminate all together. Doing this analysis showed me something I hadn’t seen before. All of my little losses (paying for information in a stock if you will) could amount to about 50-60k a month in my trading. So it is my recent quest to figure out how to cut some of that fat and put that money back in my pocket.
Again, it does not matter how you analyze your results but you must have a way to look at your numbers from a quantitative point of view. And you must use your journal as a way to help you keep track of your progress. Yes we all have different styles, time frames, risk parameters, types of trades, etc, but in the end we are just trying to squeeze money from the market consistently.
Gilbert “Gman” Mendez is the head trader at SMB Capital.