sqa said:
He works at a Prop Shop, it's all sorcery.
Well, to be more exact: for keeping track of performance you can do a whole bunch of things... what I mentioned wasn't something my work makes mandatory or presses upon traders, just another tool that's available. I use it, and that I've seen others use it, but it's not exclusive to the prop world... I think the first place I heard about the concept was in 'Super Trader' by Tharp, and my own personal take on it extends the concept a bit.
When I say 'risk multiples' I basically mean try to get some common understanding of what a given setup/trade/strategy is worth to you (that is, how much are you willing to spend in order to see if it will work out, or 'preconceived risk',) so you can measure return in units of risk taken
**. (ie, if you're total stop out on a trade is $150, then that's 1 unit of risk. If you make $300 on that trade, you returned 2R, or two risk multiples. This also allows for tracking actively managed risk or plans that involve trailing the stop, where the trader might close a trade out before hitting the initial hard stop level, and thus record a result like -0.33R in an example like what we just did where the trade is closed out at a loss of $50.)
With that, and an understanding of expectancy for the given idea/setup, you can start to solve for 'relative risk' between ideas (assuming you want to evenly distribute risk between ideas, weighted properly for expectancy.) This works even if the ideas aren't closely related or have entirely different characteristics.
Practically speaking, viewing your performance like this can help when you have a given max $ (risk) amount you're working with within a day, and you need to split that amount up between trade ideas, or at least avoid pushing past that limit at any given time while floating multiple trades that are still individually within their respective targets and limits (to avoid some higher level risk control function from flatting you out.)
**$'s aside, as you track your day-to-day in these 'units/multiples of risk', when you start 'jack'ing up your size, you can still keep tabs of how well the trades themselves are performing vs your expectancy and past results.
Lastly, before you say: "but if I just measure pips then that too is independent of how many lots I'm using, why isn't that just as good as far as units of measurement go?"
Pips don't tell me much about what preconceived risks you took to gain them. Someone can tell us that they average 30+ pips a week, and have been hitting that consistently for months now, but for all we know the trader could be just floating losses indefinitely to achieve such a result. We end up hearing +30, +30, +30, then one day silence and an implied blowout.
Think of all the 'averaging down' or martingale type systems that look great and hella consistent on paper all the way up to the point just before they blow up... since their ultimate risk is usually the entire account (or at least a good portion of it,) their R multiple on a winning trade might be dismal.. like ~0.0001R return. If we viewed systems from this perspective, all the straight-line, near perfect looking, equity curves we see on MyFXBook would show their stripes long before the eventual implosion.
