Analysis of trading strategies in trading: what should be considered?

Perhaps the most important thing to keep in mind if you are serious about trading is the perception of trading as a business. As in any other business, your success depends on market analysis, ability to make forecasts, and also on competent money management.

Market analysis for making informed trading decisions includes examining each trading instrument you intend to trade, including choosing the appropriate time period for trading. To apply a consistent market analysis methodology, you must adhere to a working trading strategy.

After developing a trading plan, the next steps for a trader should be testing their strategy using software. For example, the strategy tester MetaTrader. You can also try to trade on a demo account.

The appropriate time period for the correct evaluation of the trading system is likely to depend on the trader, but many traders use three months to determine whether the chosen strategies will be profitable in the long term.

Studying your trade statistics

Although trading can sometimes make a lot of money in one day, in most cases money is made over time thanks to patience, strategic thinking and a viable trading plan. Once the trading plan is developed and implemented, you can get statistics on its development. This data will provide the trader with valuable information, which can then be used to improve his trading system.

Statistical results obtained as a result of trading activities for a certain period are used to assess the effectiveness of the trading plan. One of the most important considerations when evaluating trading strategies is the estimated time period, which may vary depending on current market conditions.

Profits and losses on the trading plan can vary significantly when using different time frames and strategies. For example, a short-term trading strategy in consolidations will differ significantly from a trading strategy based on a long-term trend when it comes to evaluating and comparing trading results.

Trading performance indicators of a trader are divided into two main categories.

1. The first category consists of indicators that measure the performance of the trader and the functionality of his equipment. For example, the number of trading errors made, as well as problems on the part of the broker, which can adversely affect your trading.
2. The second category consists of indicators of the effectiveness of the trading system, which usually measure the financial success of the trader. This may include such things as net profit, the total number of profitable and loss-making transactions, the maximum drawdown. Evaluation of these indicators is necessary for the trader to determine whether to continue to use the selected trading strategy.

Metrics are used by various types of market participants.

Analysis of trading strategies plays an important role for traders who adhere to the trading plan and use statistical analysis to determine how to improve their trading skills and practices.

In addition to discretionary and systemic traders who trade at their own expense, other financial professionals also regularly study trading indicators to evaluate their performance. For example, a fund manager can use trading metrics to evaluate their past performance and gain insight into the amount of risk they take.

Social traders are another group of traders who can benefit from using the trading metrics of a particular trader. In this case, they will look at the statistics of the trader whose transactions they are going to copy. By analyzing the results of his trading, a social trader can better understand the search criteria for entry and exit points in the market. This gives the social trader a better understanding of the trading methods of the professional trader, which ultimately can be incorporated into their own trading plan.

Risk managers for large trading companies are another group of financial professionals who use metrics to assess the risks of traders. Large financial institutions use risk managers to determine the level of risk that is available to their traders. 

Analysis of trading strategies: key values

Traders usually focus on some indicators more than others. For example, net profit is generally taken into account first. However, there are many other indicators that are also very important.

Below is a list of the 12 most popular metrics that are commonly used to improve trading strategies and measure the success of a trader.

Net Profit - This is the most viewed trading metric. Indicates how much a trader has earned, net of losses. When considering net profit, the timing during which the net profit was received, as well as the amount of capital used to obtain this profit, are of great importance.

Percentage of profitable trades - is determined by dividing the number of profitable trades by the total number of trades, which gives a percentage of profitability.

Percentage of losing trades - just like the percentage of profitable trades, is the number of losing trades divided by the total number of trades. The percentage of profitable and loss-making transactions can be very important when evaluating the money management rules used in this account.

Biggest profitable trade - this refers to the biggest profit that the trader received. This indicator may be important if the amount of the most profitable transaction is a large percentage of net profit.

Largest losing trade - shows the level of risk to which the trader exposed his trading account. This indicator is extremely important when considering the issue of copying trader's deals.

Average profitable trade - the average profitable trade is obtained by summing the sum of all profitable trades and dividing this number by the number of profitable trades.

Average unprofitable transaction - the average unprofitable transaction is calculated by adding the sum of all losses and dividing this amount by the number of unprofitable transactions.

Average position holding time is the amount of time a trader holds a position. This indicator determines whether the trader is a short-term, medium-term or long-term trader. For example, the average retention time for a scalper can be less than a minute, while a long-term trader can hold a position for several months. The average retention time is calculated by dividing the total retention time for all transactions by the number of transactions.

Retention time of a winning trade in comparison with the retention time of a losing trade - this indicator may indicate whether the trader holds losing trades for too long or refuses profit, exiting profitable trades too early. Keeping losing trades for long periods binds capital, which can be better used in other trading opportunities.

Maximum drawdown - this very important metric shows the decrease in capital on the account after a series of losing trades. For example, if a trader had a maximum losing streak of $ 100 on an account of $ 1,000, then the maximum drawdown for his account would be 10%.

Series of losing trades - these statistics show successive losing trades made on the account. This metric can be misleading, since a streak of failure can be associated with many small cash losses and may indicate a reasonable money management strategy.

Average profit from a transaction is the average income for each transaction. It is calculated by multiplying the percentage of losing trades by the average loss and subtracting the amount from the percentage of profitable trades multiplied by the average profit.

Analysis of trading strategies by the listed metrics can be the key to improving your trading skills. After the trading system has been evaluated for three months and then tested on a live account for a similar period of time, the trader is likely to have enough statistical information.

Of course, one of the main reasons for using metrics is to develop a reliable trading plan. Without a trading plan, a trader can be compared to a traveler without a compass or map. Knowing what to look for when analyzing metrics can significantly improve your own trading results, as well as your confidence in copying the deals of others whose trading results meet your standards.

Remember that a particular strategy may be suitable for only one trading style. For example, as long as suitable trading conditions for the range continue to exist, this strategy may show positive results. However, when a breakdown from the range occurs and a trend sets in, other trading systems following the trend are likely to surpass the original range trading system.

By periodically performing an analysis of your trading in real time, you can easily identify such a situation, as well as adjust your strategy in accordance with new market conditions in order to maximize overall profitability.

Tools for analyzing trading strategies

Before starting the analysis, you can prioritize various indicators of the effectiveness of your trade. Here you can take into account your personal risk tolerance and profit goal. For example, you can set the maximum allowable drawdown or the minimum goal of net profitability.

If a trader uses MetaTrader as his trading platform, he will be able to calculate various metrics for his trading system in his terminal. You may also need a strategy tester to test a trading robot or expert advisor.