What's Your Efficiency As A Trader
What's your trading efficiency? Well if you have a system that gives you 80R in a year, but you only capture 40R in profits (losing the rest in mistakes), then you are 50% efficiency as a trader.
And from what I've seen that might not be that bad. Many traders are so inefficient that they can turn a winning system into a losing system. That means the system might give you 80R, but you make so many mistakes that you actually lose money.
You might not take some trades.
You might take some discretionary trades that lose money.
You might not keep your stops.
You might get out of a winning trade too soon.
You might not plan for some worse case contingency that comes along.
And all of these mistakes can make you a very inefficiency trader. And most inefficient traders repeat the same mistakes over and over again.
Comments
Hi, I was wondering whether the 80R example is just an arbitrary number or is that a typical/average performance in systems you've seen? What would you consider a good annual R return for a day trading system?
Thanks
Eyal
Posted by: Eyal | December 4, 2006 09:45 AM
This post on trader efficiency is one of the very best so far on this blog IMO.
Posted by: Steve in Stafford | December 4, 2006 05:17 PM
That depends on where you place your stop. Tighter stops will give more Rs if price goes in your favour, yet you might be stopped out very soon.. 80R is very possible. Remember Tharp's classic book where he talks about the opportunity factor..
Posted by: JN | December 5, 2006 12:35 AM
For the purposes of this efficiency calculation, do you consider plain ol' losing trades where you DID follow your rules to be part of the 40R or just trades where you violated your rules (i.e. a mistake)?
Posted by: Dave | December 5, 2006 12:28 PM
Tharp,
Could you comment on the dollar and currencies?(Maybe on your newsletter). The last big mac index is from march 2006 and I'm finding diffult to follow the system discribed on your book. There is almost no currency undervalued by more than 20% that is paying as well as the dollar AND is on a stable low-inflation country. I'm trying to avoid the dollar but I'm not sure how
Posted by: John | December 6, 2006 08:21 PM