Performance Metrics: Digging Deeper than P/L

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 is able to capture data elements with which we use to calculate complex measures that help to paint the entire picture of how you or your system traded. These measures can be grouped into 8 categories which encompass the areas that we believe have the greatest, most direct, and most profound bearing on an outright trader's P/L.


Drift

Drift metrics are useful in determining how much risk a trader takes in open positions, and conversely how much profit potential the trader sees in open positions. If a trader relies upon the level of a his P&L alone as an indication of how well he or she is doing, he misses a vital statistic that indicates how many negative or positive ticks his open positions experience before they are closed. An example will clarify the uses of drift metrics.

If a trader takes a long position at 100 and then allows the position to lose several ticks to 95 before closing it out for a small profit at 102, in P&L terms the trader has performed averagely well. However, the negative 5 ticks that the trader allowed the position to drift is reflected in the Negative Drift value.

On the positive side, if a trader takes a long position at 100 and the market trades up to 108 and then soon after the trader covers his position at 105, the entire profit of 8 ticks that was available is expressed in Positive Drift.

Negative Drift: Amount of risk taken in open positions
Positive Drift: Amount of profit (either realized or unrealized) available in open positions.
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Lost Opportunity

The Lost Opportunity measure is useful in determining how much profit was left on the table. Lost Opportunity Drift is calculated by taking the difference in the Positive Drift of a position and the realized P/L, or where the position was covered.

As an example, a trader takes long position at 100 and the market trades up to 108. Soon after the trader closes the position for a profit at 105. The Lost Opportunity value is 3 ticks (108-105).

Lost Opportunity Drift: Amount of unrealized profit that was lost in a position.
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Shape of Trade

The Shape of Trade is a very powerful visual representation of 7 primitive measurements, namely:

Average Negative Drift
Average Positive Drift
Average Lost Opportunity
Average P/L
Average Time to Negative Drift
Average Time to Positive Drift
Average Time in Trade
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Consecutive Winners, Losers, Scratches

Being able to determine when winning and losing streaks occur, the size of the streaks and under which circumstances they occur is of significant value.

Consecutive Winners: The number of consecutive, or back-to-back winning trades.
Consecutive Losers: The number of consecutive, or back-to-back losing trades.
Consecutive Scratches: The number of consecutive, or back-to-back scratched trades.
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Stacking

Stacking refers to a measurement that determines how well a trader recognizes a potentially good trade, having placed an order in the marketplace and supported his decision by increasing leverage and exposure by adding additional orders in the same format.

Conversely, negatively stacking measures if, when, and to what extent the trader is leveraging his losses and adding to a losing position.

Negative StackUp: The number of instances in which the trader added to a losing position.
Positive StackUp: The number of instances in which the trader added to a winning position.

Negative StackUp Quantity: The number of contracts the trader added to losing positions.
Positive StackUp Quantity: The number of contracts the trader added to winning positions.
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Time Measures and Intervals

We provide various time-related measures.

Time in Losers: Time interval taken to accept a loss.
Time in Winners: Time interval taken to take a profit.
Time in Scratches: Time interval taken to scratch a trade.
Time Since Last Trade: Time between closing a position and opening a new position.
Time Since Last Loss: Time between closing a losing trade and initiating a new position.
Time Since Last Win: Time between closing a winning trade and initiating a new position.
Time Since Last Scratch: Time between closing scratched trade and initiating a new position.
Time to Positive Drift: Time taken to reach the best possible profit point in the trade.
Time to Negative Drift: Time taken to reach the maximum point of risk in the trade, or the worst possible loss amount in the trade.
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Quantity

Quantity reflects either the number of trades, the number of round turns, or the number of contracts traded, depending on which measure is desired. Additionally, quantity values can be isolated by winning trades, losing trades, and scratched trades.

Quantity: Number of trades (defined by round turns)
Win Quantity: Number of winning trades
Loss Quantity: Number of losing trades
Scratch Quantity: Number of scratched trades

Quantity (contracts): Number of contracts traded
Win Quantity (contracts): Number of winning contracts
Loss Quantity (contracts): Number of losing contracts
Scratch Quantity (contracts): Number of scratched contracts
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Profit/Loss

TraderDNA provides the flexibility to look at an overall P/L metric, as well as more specific P/L metrics. The ability to split P/L earned/lost by losing and winning trades is an important function in examining the size of winning and losing trades, side-by-side.

P/L: Amount of profit or loss
Win P/L: Amount of profit in winning trades
Loss P/L: Amount of loss in losing trades
P/L Per Contract: Amount of profit or loss, per contract traded



© Copyright 2007 David Adler
All rights reserved

All analysis generated with the TraderDNA Analyzer.

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.