A vital component to trading is carefully tracking our performance against a goal.
For a goal, many will say “beat the market” yet when we actually look at our interim performance, most won’t actually be doing that. Largely because they don’t track anything, don’t make any adjustments, and are foolishly expecting to wing it and achieve their goal.
5 years in the mortality rate for the majority of retail trading accounts. Let’s not be part of that. With a little bit of structure and analysis, that narrative can be changed. Rather than just seeing what happens and being upset it’s not working, we can create usable data to make informed decisions.
A couple of concepts I use and find useful:
1. Start with what your trading objective is. This is an important barometer and the basis for all subsequent comparison. For example, if your goal is to achieve a higher return than the SP500, you’ll want to track your returns compared to that. If you want to experience less volatility than the SP500, again, you’ll want to track against that. Clearly defining WHAT your goal is important.
2. Next is creating data points we want to track for the portfolio, against our primary and secondary goals. For me, I used to target at least 15% per year. Over the last 4 years I’ve begun guiding down to 12 and now 10%. Each month, I like to look at ROC, ROIC, MDD, Variance, Max Risk Allocated, Min, Avg beta weighted deltas, Avg portfolio Vega and Theta, etc.
3. From there, I break down my metrics into individual strategy data points. Similar to the portfolio level, I like to clearly define the goal of the strategy and create metrics against that. For example, my covered strangle strategy I like to trade IV/HV plots, scaling protocols, IV movement in trade, stock price movement in trade, TA analysis, profit from delta vs vega etc. For my ratio diagonals, I care more about direction, theta decay (on the longs) etc.
There’s a balance between usable information and data overload and it takes a little tweaking to find the right balance for you. I’d start with more data (but not so much you don’t actually track things) and refine what you need from there. If you don’t track anything I’d highly encourage you to reconsider.