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HOME / BLOG / THE TOP 17 TRADING METRICS (AND WHY YOU SHOULD CARE)
Let’s face it, most traders struggle to make money. Sure, they might have a nice winner
once in a while, but overall, they are either losing money or maybe break even at best. It's
estimated that 90% of all traders are just losing money (link to pdf) in the long run. While
there are many possible reasons why traders are losing money, one of the major factors is
that they are not analyzing their trading performance using the correct trade metrics. In
fact, most traders are not analyzing their trading performance at all. In this article, we will
explore the top 17 trading metrics and why you should consider using them. Note there are
plenty of more metrics you could look at, like the payoff ratio mentioned here. But I
believe the following top 17 metrics are all you need.
So, what are the top 17 trading metrics you should use in your trading?
1. Net profit
2. Profit factor
3. Win ratio
4. Average winner
5. Average loser
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6. Holding time
7. Expected Value
8. Expectation
9. Biggest winner
10. Biggest loser
11. Max. Drawdown
12. Winning Streak
13. Losing streak
14. Risk reward
15. Avg. MFA
16. Avg. MFE
17. Avg. ETD
We will explain each of these trading metrics in the following paragraphs. But first, let's
look at what trading metrics are and why you need to use them.
Most traders start out with a trading strategy they found somewhere and which looks very
promising. They start trading the strategy for a while and might even have some initial
success with it. But sooner or later they get a couple of losers and that’s when they start
doubting their new strategy. The initial success is quickly forgotten and they traders start
thinking about ways to avoid those losers they experienced. Some just start randomly
changing the strategy in some form or shape hoping this will avoid the losers. Other
traders don’t even bother and go out on the internet to find the next holy grail strategy.
From here they again start trading their new/changed strategy and the cycle repeats.
Sooner or later they get in a losing streak and doubt/fear starts to get in their mind and so
they change the strategy again or go out searching for another strategy.
This strategy hopping is what most traders do. They didn’t build up any confidence in their
strategy and so they abandon it the moment they experience a few losers.
What traders should realize is that losers are part of life and part of trading. No matter
which strategy you use, there will be a period where you are going to experience a losing
streak. That is why you cannot judge a strategy based on only a handful of trades.
So how to gain confidence in your trading strategy? By (manual) backtesting your strategy
and gathering the trade metrics for at least 100 trades and preferably 6 months of
historical data. This will cost you nothing except some time and effort but it will give you
invaluable information and the confidence that your strategy works.
They will tell you what you how many losers in a row you can expect and what your
average or max. loser will be. Having these numbers will make a big difference in your
trading. Why would you start searching for a new strategy (for which you don’t have any
statistics) when you know your current trading strategy has proven to be profitable over at
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least 100 trades, and that you’re just experiencing a drawdown period which is perfectly
normal based on your trading metrics
This is probably the biggest reason why you should use trading metrics. To get the
confidence that your strategy works and to be able to stick with it when you encounter the
inevitable losing streak.
But when you are a profitable trader the trading metrics will give you valuable information
where and how you could improve your trading performance. Note that now you are
making (small) changes based on statistics. Not on fear or intuition like losing traders are
doing. Again, you backtest these changes for at least 100 trades to get your new trading
metrics & performance. This will verify if the changes you made actually improved your
trading performance or not.
1. Net Profit
Net profit is probably everybody’s favorite trading metric. The net profit is just the amount
of money you made after deducting all the trading commissions/fees and other expenses.
A negative net profit means we’re losing money and a positive net profit means we’re
earning money. It goes without saying that traders are always searching for ways to
increase their net profit. However net profit is probably not the best metric to use since it
does not say anything about time and volume.
For example, let’s compare the following two traders.
Trader #1 has a net profit of $10k after 2 weeks of trading.
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Trader #2 has a net profit of $40k after 6 months of trading.
2. Profit Factor
The profit factor measures the amount of money made against the money lost while
trading. It measures whether the overall outcome of trades is profitable. It is normal to
incur losses in the course of trading as well as make profits. The way to measure the profit
factor is to divide the total winnings against the sum of all the losses. The profit factor will
tell you the real results of your efforts when trading.
Profit factor = (gross profits) / (gross loss)
The ideal profit factor should be more than one. Anything below one is considered as a
poor performance. There is a grading system for the profit factor to help traders know the
performance of their trades. It can be easy to assume your trades are doing well when you
rake in immense profits from one trade and multiple losses from other trades.
Profit
Performance Description
factor
Below
Bad Trader is losing money
1
1.0 Bad Trader is breakeven, but still
losing money when taking
commissions an fees into account
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Trader is making money but his
strategy is not very robust and
1.10-
Average small changes in the market
1.140
volatility might have a huge
impact on this trading strategy
Trader is profitable and can
1.41
Good withstand small changes in the
-2.0
market
Very few traders manage to get a
Above
Excellent profit factor of 2 or more for a
2.0
long time.
A factor of 1.0 and below is a poor performance. The range of 1.10-1.40 is average
performance, while 1.41-2.0 is an excellent performance for trades. Any profit factor that is
2.1 and above shows that your trades have outstanding performance.
The profit factor is a good indicator of when a trader needs to change or improve their
trading strategy. It is simple to calculate, and you can do it regularly to see your daily
performance. You can analyze trades that that has a high-profit factor. You will be able to
identify the trades that had a lot of profit and try to replicate it. The same is true for the
losers. Analyze those and see how/if you can avoid any trades with a profit factor below 1
3. Win Ratio
The win ratio is an essential metric. The ratio represents the ratio of winners vs losers.
Calculating the win ratio takes the number of profitable trades divided by the total number
of trades
Winratio = number of winning trades / (number of winning traders + number of losing
traders) * 100.0 %
Most beginning traders make the mistake to think that the win ratio should be above 50%
to make money. While it might sound logical that you can only make money if you have
more winners then losers this is actually not true. If your winners are making much more
money than your losers then you can still make money with a relatively low win ratio
Example. let’s suppose your winners are making $100 profit and your losers are costing
you -$20
Your win ratio should then be at least 16.7% to break even since one $100 winner will
compensate for five $20 losers.
So always look at your average risk/reward when looking at your win ratio.
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4. Average Winner
The average winner shows you the average amount that you win per winning trade. The
average winner is calculated by dividing the total amount of profit made by all winning
trades by the number of winning trades.
Average winner = (total profit made by all winners) / (number of winning trades)
The average winner and average loser metrics are used to calculate the expected value
and expectancy. Besides they give us an indication of how much an impact a loser might
have. For example, if your average loser is 3x your average winner then that means that a
single loser will wipe out the profits of 3 winners. That again would require that your win
rate is high enough and that you have 3x more winners than losers. This could be perfectly
fine if you use a scalping based strategy but would be horrible for a swing strategy.
5. Average Loser
The average loser shows you the average amount that you lose per losing trade. You can
determine the average loser by dividing the sum amount of all the losses by the number of
losing trades.
Average winner = (total loss from by all losers) / (number of losing trades)
Again the average loser and average winner will tell us how much impact a single loser
might have and both are used in the calculation or the expectancy and expected value. In
general, we want the average loser to be as low as possible and the average win as high as
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possible. Note though that exceptions exists e.g. when using a scalping strategy.
6. Holding Time
The holding time is the average time you are in a trade. It’s important to traders since your
capital is ‘locked’ during the time of the trade and cannot be used for other trades. This
might be less relevant if you are a day trader and your trades only last a few minutes. But if
you are a swing trader which has trades which can take weeks or months then the holding
time becomes an important factor.
When your capital is locked in a trade, then you cannot use that capital for other trades
that might come along. That way it limits the number of trades you can take
simultaneously. As we saw in the explanation of the net profit this could mean that your
net profit is limited just because you’re holding time is too long.
Besides limiting your potential net profit there’s another risk of long holding times. The
market often reacts violently when important news, or earning reports get released or
disasters happen. When you are in a trade during these events your trade might go against
you and stop you out. That is why many traders won't open new trades just before or
during important news events. But note you cannot always predict these events. Some
disasters might happen, trump might suddenly tweet to boycott china or a new war may
be started in the middle east. All unforeseen events which could impact your trade.
7. Expected Value
The expected value shows you the average amount you might earn (or lose) on a trade. It’s
a very important metric since it takes into account your average winner, average loser, and
win rate.
The formula for determining the expected value is as follows:
EV= (Percentage Wins x Average Wins) - (Percentage of loss x Average Loss
The expected value is another metric that will show you if your strategy is profitable or not.
But besides this, you can use the expected value as a first take-profit target since most of
your trades should at least be able to reach this, based on the statistics.
8. Expectation
The expectation can be used to determine how robust a trading strategy is. We already the
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expected value which is the average amount we can expect per trade. The expectation
takes this value and divides it by the average loss:
Expectation = (Expected value) / (Average loss)
By dividing the expected value by the average loss we get a number which indicates how
robust your strategy is When the result is between 0-0.4, it shows that an investment will
probably have a negative return. A of 0.5 is okay, while a result of 0.6 and above is a
healthy positive return.
The expectation metric generally determines whether the expected value has a high or
low risk. The changes in the markets cannot be predicted 100%. Therefore, a strategy may
have a positive expected value, but it cannot positively return in the worst-case scenario.
Measuring the expectancy of trade against the possibility of a loss will tell a trader how
safe his strategy will be. Traders must find trades that have positive yields even when
there is a little turbulence in the economy. Even though the expectation doesn't confirm
that trade is 100% safe, it is a good measure to determine the safest trades available. It is
an excellent way to ensure that you only make trades with high returns during the ideal
economic conditions.
9. Biggest Winner
The biggest winner is the trade that contributes to a significant portion of the net profits.
Sometimes, a trader can make single trades that can have very big returns that affect the
trader's overall net profit. While big winners are very nice, we should be aware that they
are outliers. Most trades will not be big winners, that’s why we use the average winner in
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most calculations.
But the biggest winners could influence our statistics a lot and they could result from just
pure luck. Suppose our average winner is $100 and or the biggest winner is $4000 then
that one big winner is the same as 40 average winners!! Since that 1 big winner made such
a huge impact, we might want to see what our results are if we did not have this big winner.
Is our strategy still profitable without it? Or does our entire strategy rely on those big
winners to make money? Most trading journals will allow you to filter out the biggest
winners (or losers) to see how they affect our trading performance.
Removing the biggest winner will show the actual average wins of your trades. It will help
you see whether your trades had low ROI and how you can improve it.
The risk-reward and win rate are also dependent on your own character. Some traders just
hate losing and they cannot cope with that very well. Those traders will tend to choose a
strategy that has a high win rate and thus a lower risk/reward ratio.
Other traders like having those big winners once in a while and don’t might all those the
small losers in between. Those traders will naturally favor for a high risk/reward and lower
win rate strategy.
Having both a high risk/reward and a high win rate sounds like the holy grail, and it is.
Although traders should always try to improve their trading performance, they should
avoid into getting into an Indiana Jones adventure to search for the holy grail 😊
Risk:Reward Winrate % needed
1:10 9%
1:5 17%
1:4 20%
1:3 25%
1:2 33%
1:1 50%
1:0.5 67%
1:0.3 75%
Erwin
I am the owner of EB-Worx. Together with my wife and dog I live in
the Netherlands where I love to day trade the ES-mini and develop
software which helps me to become a better trader.
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