Even if you are consistently making trading profits, you need a form of performance evaluation to make sure that you are making best use of your strategies and maximising your profits. Much of trading education is concerned with the knowledge of technical analysis and trading strategies, and while these things are vital, unless you have in place a continuing system of performance evaluation, then you are leaving profits on the table.
Performance evaluation starts when you explore your possible trading strategies. The overall performance of a trading system can only be determined over a period of time, by examining its track record, and history is no guarantee of future profits, but you have to start by assessing the system’s initial performance to get a baseline from which to measure improvements and problems.
The critical factors that you need to record and explore are twofold. First, you are certain to be interested in the probability of winning trades versus losers. It is a simple process of listing all of your trades or bets, and determining how many worked out, either in back testing, or in your daily trading. The other significant factor is the profit/loss ratio, the amount of money won compared to the amount lost, both as gross figures. With these two numbers you have the main information you need to perform a performance evaluation.
There are other numbers that can be used to express how well or badly your spread betting system performs, and whether it is one that you can realistically put to use and expect a profit. With some systems, you might have the possibility of a large drawdown in your profits, and this is something where many traders have a certain threshold before they are tempted to deviate from the plan, whether it is 20% or 30% of their equity. Another question is how much you have at risk in any one position or bet. Some trading systems will place this at for example 2%, while other systems allow this quantity to vary based on other factors, such as perhaps the reward/risk ratio of the individual trade.
Finally, if you do much spread betting or trading in general, you could also look into the ongoing profit and loss situation on your account, using the unrealized profit and loss numbers, that is trades that are in progress, without any resolution of how much they will finally yield or cost.
Establishing a method to store this information while you are actively trading is very important for your profits, and to encourage you to make improvements. If you find that the performance of your system in practice deviates significantly from what your back testing led you to expect, then perhaps you need to find out why. And regular performance testing allows you to incrementally refine your strategies and determine the results are as you expected.
Many traders find that the end of the trading day is a good time to collect their thoughts, and to assemble a review of the day that can include collating the figures. With this information, the trading strategies can be revisited perhaps once a week, and any improvements made to the system.