How Are You Doing?

There are some questions that you just don't want to answer, even to yourself. If you have been struggling with the impact of adverse events on the markets in the last two weeks, you don't want anyone, even a caring loved one, to ask "How are you doing?" Sometimes we just don't want to look at how well we are doing. If we are mounting losses, it's easier to avoid looking at how well you are doing. Indeed, sometimes it can be a distraction. You look at your losses. You feel guilty about them, and then guilt turns into disappointment. You are stuck and paralyzed. You can't think creatively, and now you are in a slump. Unfortunately, everyone eventually must ask and answer the dreaded question, "How well are you doing?" The answer may be unpleasant, but you have to face the facts eventually. You can't live in denial. You can't keep living a life of naive bliss by feeding your account every month to avoid looking at how poorly you are doing. It's natural to take such measures, though. We all want to be successful, and it can be devastating to discover that despite our best efforts, we just aren't trading profitably. Sure, it takes time to hone your trading skills, but if you are losing money every month, you must be doing something wrong. Why not do something right and take home huge profits?

It is vital to monitor your trading performance on a trade-by-trade basis. It is useful to keep track of your dollar-based win-loss ratio. There are many ratios that you could use to gauge your performance, but a win-loss ratio based on dollar amounts is a useful marker of performance. It's simple to calculate if you keep records. Always record the dollars won or lost on each trade, then divide the dollars won by the dollars lost. (You could use a simple win-loss ratio comparing winning trades to losing trades, but if you ignore the dollar amounts, it's possible to obtain a reasonable win-loss ratio, but still mount substantial losses.)

If your dollar-based win-loss ratio is 100% or lower, you are bound to blow out your account over time. In order to survive, you must increase the ratio. Seasoned traders tend to have a ratio of 200%, in other words, for every dollar they lose, they win $2. Some professionals have a ratio of 400%.

Why do some traders have low win-loss ratios? One of the reasons is that they don't look at the potential risk before they make a trade. They take setups that are overly risky and unlikely to produce a profit. Rather than take the trade, they would be better off waiting for a better trading opportunity, a trade setup that potentially could provide large profits and little risk. It's not easy. It takes patience, and a strong commitment to study the markets and identify good setups. But, in the end, it's worth it. If you carefully select high probability setups, you'll trade more profitably and you'll be more satisfied with your performance. Suddenly, you'll find that you'll get on a roll and your profits will increase greatly over time. By carefully monitoring your performance and managing your risk, you'll see your profits reach new highs. So as hard as it is, don't be afraid to ask, "How am I doing?" It's better to find out, change your approach, and make the profits you desire. And when you do, the answer to the question will be an enthusiastic, "I'm doing great!"