Explaining Your P/L

When assessing the performance of a trading system, the benchmark by which we most often measure the efficacy is P/L. This makes perfect sense and P/L is the first measure we should consider. It should be used as a starting point though, from which to drill deeper in order to discover the reasons behind the P/L value(s).

If we use P/L alone as an indication and summation of what has happened, we will only know so much. Yes, we will have the big picture, but we will be missing the more important information: what specifically formed the big picture; what made my P/L what it was. An example will clarify this...

This represents the total amount (in USD) won or lost over a period of time (cumulative P/L). Judging from this number alone, you might deem my trading unsuccessful since, afterall, I lost $8,430.00. The goal though, should be to draw specific, rather than broad, conclusions. There are countless ways I can explore this number by splitting it up and dissecting it. For example, I trade 5 markets...

The first column shows the number in the previous chart split up by market. The middle column shows the number of trades in each market, and the third column shows the average P/L per trade. It is important to refer to average P/L before referring to cumulative P/L because average takes into account the number of trades.

Now I can reach a more detailed conclusion that my trading was poor in the S&P and Brent, but was profitable in the other 3 markets I trade. This conclusion, however, is still too broad. I want to know specifically why my trading was poor. If I have been better at trading the Crude than I've been at trading the S&P, I want to be able to explain that difference. What did I doing differently in these markets? WHY have I performed worse in the S&P?

This is where P/L can only take us so far. It is important to discover the cause for these P/L values in the first column above.

We've developed a variety of complex measures that we've incorporated into TraderDNA. Similarly to your trading software capturing and keeping track of your P/L while you trade, our technology captures data elements from which we calculate exotic measures that help to paint the entire picture of how you or your system traded. My next post will describe these measures in more detail. For now, I'll show you how a few of them might be used with the example above.



Here I'm finding out more about my trading in various markets. I can use the first two columns as a reference when I'm interpreting the last 4 columns. The third column (Neg. Stackup) shows me the number of times I added to losing positions. The 4th and 5th columns (Neg. Drift and Pos. Drift), show me how much risk I'm taking on my average trade and how much profit opportunity I'm seeing in my average trade. The last column (Lost Opportunity Drift) shows me how much money I am leaving on the table when I have opportunities to take profit.

Here are 4 more measures: average time in losing trades, average time in winning trades, average number of consecutive winners, and average number of consectutive losers. These charts help explain more of the big picture and help to refine the conclusions we came to above.

© Copyright 2007 David Adler
All rights reserved

All analysis generated with the TraderDNA Analyzer.