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TimRacette

Calculations to Help Fine Tune Your Trading Strategy: Part 2

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Once you’ve placed some trades with your strategy you can begin to analyze the data. A paper trade account is a great way to tweak and fine tune, but switching to a live trading account WILL change your results (this could be good or bad).

 

The more data the better, as a rule of thumb place at least 100 trades with your specific setup before analyzing the data.

Use these calculations to help analyze your data:

 

Winning and Losing %:

 

Winning % = # of Winners / Total # of Trades

 

Losing % = 100 - Winning %

Average $ of Your Winners and Losers:

 

Avg. Winner $ Amount = Sum of Profitable Trades / Total # of Winning Trades

 

Avg. Loser $ Amount = Sum of Losing Trades / Total # of Losing Trades

Average Hold Time of Your Winners and Losers:

 

How long do you stay in a winner versus a loser, are there noticeable differences? Find that sweet spot.

 

Reward / Risk Ratio:

 

How much do you winners beat your losers = Avg. W / Avg. L

 

Profit / Loss Expectancy:

 

This is the calculation that often gets overlooked, but is inevitably the most important. Expectancy forecasts your futures profits. It tells you the average $ amount you can expect to win (or loose) per trade.

 

Expectancy = [(W % x Avg. W) – (L % x Avg. L)] – round turn commission

 

Record Keeping Tips:

 

Keep track of your profit loss, commission, daily winners and losers, weekly profits, and individual trade setups. This will help you spot trends in your trading and fine tune even more. In my post Ideas for Building Your Personal Trading Journal I outline some more ways to make this process easier.

Tools to Help Fine Tune Your Trading Strategy

 

Trading Journal Spreadsheets – The best trading spreadsheets around.

StockTickr – A web based platform with a breadth of in-depth analysis tools and charts.

FinViz – My favorite stock screening tool.

Jing – Makes capturing screenshots a breeze.

 

Both Trading Journal Spreadsheets and StockTickr are great tools to help with the analytical side of your trading and in essence do all these calculation for you.

 

To become successful you must focus on trading effectively and not on the profit/loss. Do your research, and then act.

 

Here is Part 1 of this article Developing a Profitable Trading Strategy Step by Step.

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