As we approach the end of the year it is common for many traders to review their yearly performance. Most use an equity curve but those that want to improve upon what worked in 2010 take it beyond the basics. I’m talking about performing an analysis of the trade data to see where your strengths are and where weaknesses hinder your progress.
It’s extremely easy to run some numbers on the exported data from your brokerage account. See if you can figure out the “sweet spot” for holding periods or whether you make more on the long or short side. Information gleaned from your trading data can be priceless.
As we all know, the market changes and thus our strategies and systems adapt to accommodate. Here’s where you can truly learn from your trade history. Compare this years’ data with prior years’ data and see how the changes have worked over longer periods of time. This type of research is referred to as drift.
As an example, when a pizza company wants to improve their pizza they methodically change sauce, crust, toppings, etc (market approach). They run taste tests (metrics) along the way to see if the changes made were better or worse. As they moved from pizza 1 to pizza 2 to pizza 3 they collect the data on the small and barely noticeable changes made. When they arrived at an acceptable iteration, and this is key, they would compare it with the original pizza.
When the original was compared with #7 there were drastic changes but those changes weren’t noticeable when comparing the gradual changes between pizza #6 and pizza #7. This drift that occurred had formed a belief that the changes made were acceptable as they were assumed to be small an unnoticed by taste testers.
Applying the same approach to trading histories can show drift in our strategies. Perhaps you’ve tweaked your signals several times throughout the year and it appears to be working. What does the drift look like when comparing your current approach to that of 2009? What has changed? What aspects of those changes were in your control? Have the changes improved your returns?
You could go on and on running analysis on your trade metrics and improve your market participation. It’s not easy work to run the calculations but definitely worth it once the results are produced and information is gleaned. Check with your online broker and ask about exporting data from your trading account. Some brokers have decent metrics built in such as realtick. One nice solution I’ve found is offered through Ninja Trader which has the ability to connect to popular online brokers such as Interactive Brokers, MB Trading, TD Ameritrade and others.
Take some time between now and the end of the year to find out what worked and what didn’t. Enjoy the fruits of your labor in 2011 as your market participation will improve. If you have ideas or suggestions of other resources please use the comment section below so that others may benefit as well.