Statistical Analysis of Trading Results.

Statistical Analysis of Trading Results 

There are so many subjective elements in discretionary trading, but your P&L is not one of them—you are either making or losing money. Correct analysis of your P&L can reveal hidden strengths and weaknesses. You may find you trade certain market environments or asset classes better than others, or that you are trading a specific pattern well but giving back all of the P&L in other, less successful trades. In addition, tracking performance over a period of time can give early warning of problems, can highlight style drifts, and can tie performance to certain market environments. For traders at all stages of development, the main questions to ask of this analysis are: 

• Are you making money? Does your P&L show that you have an edge? Are your results better than what someone could have achieved flipping a coin or throwing a dart? 
• Is your performance dependent on one class of setup more than others? Could you improve performance by eliminating certain setups from your trading plan? 
• Is there a market, group of markets, or asset class that you trade better than others? 
• How is your performance changing compared to other time periods? These questions can be answered through some fairly simple procedures. Many brokers will supply statements that will answer some of these questions, but others will need to be addressed through your own work and records. Once these basic questions have been answered, the analysis and review can be extended with other questions, such as: 
•  Are you repeating certain mistakes often enough that eliminating them could have a very positive effect on your overall P&L? 
•  Are you achieving superior risk-adjusted performance? 
•  Are there other things that you are doing that are hurting your numbers? 

This next section will walk through a theoretical analysis to show the basic concepts and math used. (The set of trades is available from the author’s web site at www .adamhgrimes.com/ and in Appendix C.) If this type of work is new to you, you should repeat the analysis yourself and compare your results to those in this section.

SUMMARY

Trading is difficult. Markets are highly random and nearly unpredictable, diverse and unforeseeable risks crop up at every turn, and traders themselves are vulnerable to many psychological errors and weaknesses. In addition, the process of developing trading skill is a long one, fraught with hardship and obstacles. Many traders fail because they do not have realistic assumptions about the length and challenges of that process, or because they lack some essential requirements for success. This chapter addresses many of those problems, and gives valuable perspective and a much-needed reality check. A trader armed with these, and with the tools and techniques from elsewhere in this book, can develop a plan of attack and move along the path to trading mastery