It's important to have goals when trading so you can tell how well you're doing.
When I first started trading, my goal was simply "to make lots of money". In retrospect, that was a silly goal. It was both unreasonable and too vague. After losing money for a few years, I revised my goal to "Make at least $50 every day". At least this wasn't vague. But it was also unreasonable. It's just not possible to have every single day be a winner. I still lost money.
So then in disgust I finally set up a new goal: "To not lose money". This sounds like a pretty weak goal, sort of like saying your life's ambition is to not be a crackhead. Oddly enough though, once I set that as my goal, I did in fact stop losing money.
Once I wasn't losing money, I picked a new goal. This time I decided that I should be able to achieve at least a 7% annualized return. If I couldn't do that, then I might as well just buy high yield bonds and spend all day watching TV instead of the markets. So far so good. Last year I achieved a 40% return. Of course last year was quite extraordinary. But so far this year, I'm just about at the same level.
Now it's easy to perform well when the market is up. The question then becomes, am I good or just lucky? So I also have one final goal: to outperform the Dow. It doesn't matter if the Dow is up or down, as long as my gains are greater and my losses are smaller. So far, that's working out too. I'm outperforming the Dow by around 2 to 1 this year so far.
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I've had the same problem too. I was just plowing into trades without any goal or plan. I am now at least consistently breakeven. So I still have some way to go.
ReplyDeleteI also take the goal setting idea a step further by tabulating a long term projection as discussed on my blog.
Congratulations on the impressive results!
Thanks. I'm still wrestling with the question of whether I'm good or just lucky.
ReplyDeleteThis is when I wish I'd taken a statistics course in college. There are tests one can apply to determine that odds of particular results happening by chance, but danged if I know how to apply them.
I suppose you're referring to statistical hypothesis testing?
ReplyDeleteIt's simple to do in Excel with a built-in function (TTest or something). You can probably google for some examples. However, this particular method assumes a normal distribution.
As you've said, "it's easy to perform well when the market is up." The issue is comparing your returns with that of a trending market. That you can refer to paired difference test.
Other than using statistics, you can consider comparing your Sharpe Ratio (or the like) with that of some actively managed funds in the same period, which you probably know. This is also the method I prefer as it's the simplest.
Interesting. I found a good article on the Sharpe ratio in the Wikipedia at http://en.wikipedia.org/wiki/Sharpe_ratio. That will definitely give me something to chew over this weekend.
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