Are You Benchmarking for Trading Success or Trading Failure

“The standards we choose – what we are benchmarking ourselves against – are often poorly chosen” (D P Egan)

Annie Duke’s blog referred me to that excellent article by Egan. Part of the reason why over 90% of traders fail because they used the wrong benchmarks: the win-loss rate.

What they should be measuring is their consistency of execution of the decision-making process. Then over a large sample size, view the results as a measure of the efficacy of that process. In this regard, the Expectancy Return Formula will be critical.

I’ve written about the Expectancy Return Formula in many of my blogs. If you are interested in this topic, just search the blog.

The question that arises is what constitutes a “large sample size”. As a rule of thumb, theory suggests at least 30 samples. To that I would add: your sample should include the different types of market conditions. At the very least, the sample should include:

• Trending conditions (normal and parabolic) and
• Congestion (normal and violent).

By normal “congestion”, I mean situations where there is much “toing and froing” as the market moves from Primary Zone to Primary Zone.

By “violent”, I mean those times with the market behaves like a trending market within the congestion boundaries – moving directly from Primary Zone to Primary Zone.

The other day, I was interviewed by Etienne Crete. In the course of the interview, I was reminded of a book I read some time ago, “Gambling Wizards”. The book interviews the most successful professional players in the gambling world – ranging from blackjack to horseracing.

Until I read the book, I was unaware of the differences between the various activities (as a trader I would call them “asset classes”). However, despite the differences, the process success remains the same:

• Understand your subject
• Test your understanding by observing real-time applications (in our world, demo trading)
• Engage (in our world, real-time trading reduced capital)
• Practice (search the blog for Deliberative Practice)
• Review the results and improve your decision-making processes.

Interesting is it not, that so many of our traders focus their energy and effort on winning trades. But, the literature suggests they should be focusing their energy on the efficacy of the decision-making process.

What about you? What are you focusing on?

The post Are You Benchmarking for Trading Success or Trading Failure appeared first on Ray Barros’ Blog for Trading Success.