Written by Joey Fundora, longtime StockTickr subscriber.
Do you have an edge? To consistently win in the markets, a trader needs an edge that tilts the odds in his or her favor over a large sample of transactions. Beyond this, the trader needs to exploit this edge by being disciplined enough to trade the edge when it presents itself, and then manage the trade in order to minimize losses when wrong, and maximize gains when correct. If a trader truly has an edge with long term probabilities on their side, it only becomes a matter of trading the edge in large enough quantities to minimize random chance from the equation. While random chance can impact any given trade, in the long run the odds will gradually even out. Flip a coin ten times, and you could have a weird outcome of seven heads and three tails. Flip a coin ten thousand times, and odds are the results will be near 50/50.
This is how Casinos make money every day. They understand that there is always the random chance a gambler will win any given hand, slot pull, or roll of the dice. But, in the long run, the odds are stacked on their side, and with enough transactions, they will always make money. The odds donít have to be very large either, with enough transactions, a small edge can be quite profitable.
While there are a myriad of psychological factors that can impact whether a trader is successful or not, a great deal of traders struggle because they donít know if they really have an edge. Some may have an edge, yet donít truly trust it through downturns. Most traders jump from strategy to strategy, not giving the strategy enough time to eliminate chance from the equation. Some traders donít even know they need an edge, jumping on the most recent hot stock, and randomly trying to ride its momentum.
So how do you know if you have an edge? There are two general ways to quantify your edge. The first is back-testing a strategy or system that has rigidly defined parameters. While this type of back-testing is geared for systems traders, discretionary traders can benefit from back-testing a general strategy to verify itís potential. There are several programs available for back-testing, but they generally require a great deal of time and effort to program a trading system before running any tests.
The second way of verifying a trading edge, is to forward test it. An edge can be forward tested by tracking the relevant statistics with simulation (paper) trades, or with live trading. The statistics can be kept in a journal, database, or both. Although tracking statistics day to day is more time consuming, it can be more revealing, showing whether a trader is consistently sticking to an edge.
Keeping a journal has secondary benefits as well, allowing traders to review both successful and unsuccessful trades. Most expert traders keep a journal and review their trades consistently. Keeping a journal may seem boring and time consuming, but a trader can often learn more from reviewing their own trades, then from reading a book or attending a seminar. Entering trades in a journal forces a trader to view the trades in black and white, rather then from an impression in their mind. More importantly, a journal allows a trader to step back and view their trades as a group of trades, and not as individual and ultimately random transactions.
While I used to keep a journal by hand, and then using spreadsheet software, I ultimately gravitated to an online journal application hosted by StockTickr.com. I found it difficult to maintain a journal manually, especially with a high volume of trades. It was also difficult to create my own reports and graphs by hand. StockTickr allows me to enter my trades into an online journal, and it then calculates all sorts of statistics and reports I can use to track the performance of my trading. I simply enter the trade as I make it, assigning lot sizes, stop loss, and transaction costs. I can also assign any number of fully customizable tags. Tags can be used to differentiate between types of trades, holding times, sector, etc. The possibilities are endless.
StockTickr then takes care of the rest. It tracks Win Rate, expectancy, total Rís, and even creates charts of your trades automatically. For those unfamiliar with the concept of R, it is the concept of tracking profits and losses of your trades as a ratio of the initial risk taken (R). It was made popular by Dr. Van Tharp in the book ďTrade your way to Financial FreedomĒ. StockTickr also goes beyond the typical statistics, breaking down your performance, by day of week, month, stock price, specific tags, or even by market trend. Below is a screenshot of an actual chart tracking R performance.
So how does a trader benefit from all this information? First, by tracking your win rate and expectancy, a trader learns specifically how each of their strategies are performing. Second, knowing what component of your trading systems needs work allows a trader to focus on that component specifically. With the power of tagging your trades, you could track breakout versus counter trend trades, day-trades versus swing-trades, or any imaginable combination. One of the keys to enhancing your trading performance is to know what area is working at any given time and what should be abandoned.
StockTickr can also be used by traders still deciding what their market niche is, and whether it has long term potential. By tracking trades by tags, a trader can easily validate one system while eliminating another. A trader can also easily trade a certain system while paper trading another. In this manner one system can be validated without using precious capital on it.
I learned rather quickly that certain types of trades where not working for me, even though I thought they were. For instance, I learned that my breakout trading setup was getting killed by my profit taking strategy. I was getting chopped to pieces, but since I had a few large winners, it wasnít clear to me until I saw it laid out on a trade by trade basis. I also learned about what my typical win rate and expectancy statistics are, and where I needed improvement. Also after tracking a few hundred trades, I know what a typical win or loss streak is, and more importantly, what isnít. StockTickr also recently added a new feature where a moving average can be applied to a traders statistics. A trader can easily see if they are underperforming their usual statistics, and adjust their R size accordingly.
Once a trader becomes intimately familiar with their trading methodology through an application like StockTickr, it becomes much easier to notice shifts in the market that could impact them. For instance, I know how my shorting strategy should perform in an ideal environment. If I see a underperformance by my shorting strategy over a certain timeframe, coupled with out-performance of my value buying strategy, I can easily infer that the markets are in a bullish environment. It is also easier to see if Iím out of synch with the markets because the statistics will tell you in black and white. Traders who are not tracking their performance may not realize subtle shifts in the market environment or in their strategies until itís too late. Consequently, they may abandon perfectly acceptable trading systems due to typical behavior in certain market environments.
Knowing and understanding what my edge is has been one of the greatest lessons I have learned since I began trading. It allows me to not get impatient and chase trades that fall out of my structured system, because there is an understanding that the current system works. Forward testing my system through StockTickr has proven its profitability, and gives me the confidence I need to trade it. I whole heartedly recommend StockTickr to any trader looking improve their trading.