Move the Markets

How to Tell If You Are a Good Trader

Posted on October 1st, 2006
Written by Richard
Posted in: N/A (old archives)

Have you ever heard the cliché “I’m only as good as my last trade”? In other words, if I’m losing money, I must be a bad trader. I think just about everyone would say that of course that’s not true. But, I know I still have to fight that feeling when I have a few losses. The next trade I try to make, I start second-guessing myself, since I don’t feel like I know what I’m doing anymore. Reading a lot of trading blogs during the painful August and September time, I know others are falling into this trap sometimes.

In my article on loss recovery, I point out that the way to recover from a loss is to get back into the same mindset you were in before the loss. That’s good information to have, and I suggested getting away from your trading platform until you recover, but I didn’t talk much about how the heck you’re supposed to get your head back on straight. It’s hard! Here are a couple things I like to keep in mind, and repeat to myself until I fully believe them again:

• I wouldn’t beat myself up if a coin came up tails, would I? Trading is a probability game, just like tossing a coin. Just as I should not be surprised or upset when a coin flip goes against me, I should not be surprised or upset when a trade goes against me.
• If a trader has a win rate of 40%, then there is a 7.8% chance that any string of five consecutive trades are all losses. Even at a 60% win rate, the chance is 1%. So, after hundreds of trades, I should actually be surprised if there are not a few strings of 5 or more losses! It’s to be expected, and not a reflection on my ability to trade in any way.
• Judging myself based on criteria outside of my control is counterproductive and depressing. I can’t control the markets, so it doesn’t do me any good to value myself as a trader based on what the markets do.

All of that’s just longhand for you are NOT your trades. You are also not your expectancy, or your win rate, or your dispersion of losses. Rather, you are the trader, at the helm of it all. Should the captain of a ship blame himself when storms make for rough going? Or should he blame himself when he lets the ship fall off course through neglect? I think, the second, don’t you?

With that in mind, here’s a picture of how I think these things fit together:

• Your Trades Are Good If: they were executed according to your plan. (Covered fully in this article). In fact, this means that your trades can be good even if they all lose money because your plan is bad!
• Your Trading Plan Is Good If: the statistical measures for expectancy and consistency and risk of ruin are within your comfort zone. (I have written articles on consistency and several more on expectancy/risk of ruin)
• You Are A Good Trader If: you are monitoring and improving upon the other two items in this list. (That’s the point the present article is making)

Only that last one has anything to do with you, the trader. Let’s expand on what that last bullet means a bit further. To measure your progress as a trader, I suggest the following two criteria:

1. How well am I tracking and improving the way I trade to my plan? This is like the aggregate data version of the way I suggest you evaluate the quality of each trade. I suggested that you grade each trade against your trading plan in your trading journal. That way, you can periodically look over your scores. Try to make whatever changes are needed to get closer to perfect execution of your plan. This is completely under your control. For example, if you tend to pull your stops, you can start honoring them, somehow.
2. How well am I tracking and improving my aggregate trading performance? In other words, am I keeping track of my expectancy, win rate, dispersion of losses, profit factor, etc? And, once I have enough data to review, am I making adjustments to my plan to keep my overall trading within bounds that I am comfortable with? For example, if you are risking too much per trade, you will find that you are uncomfortable with your risk of ruin, and should adjust your risk management plan. I have an article in the pipeline about aggregate trading performance, which should help explain what all of this means, if you are not yet in the know.

This is easy to see as an expansion from the “trader as ship captain” viewpoint. As with anything you do, you will have successes and failures at this. I don’t suggest beating yourself up too hard in any case. It won’t get you any closer to perfection, I promise! But, at least this is a fair yardstick based on criteria that are rational, and under your control. Even after a string of really bad luck, when your account has taken a real dent, you can still feel good about yourself as a trader if you are doing those two things well. Because you are monitoring your per-trade and aggregate performance, you will be confident that bad luck was all it was, rather than a problem either with your system or your execution. That’s the kind of knowledge that can keep you sane during the bad drawdowns.

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© 2010 Richard Todd. I am not a financial advisor, and nothing on the site should be considered investment advice or actionable recommendations. I'm just an individual, saying what I think, and sharing my experiences.