Weekend Project: Optimize Your Trading For Better Profitability


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What do you have on tap for this weekend?  Gonna hit the bars with some friends? Hang out at the beach?  Perhaps you and your significant other are going to go to Home Depot and maybe Bed, Bath, and Beyond as well (if you have the time).

Let me be so bold as to suggest that you set aside a few hours this weekend for a project that will improve your trading….and your profitability.

This project can be as complex and in-depth as you want, but it need not be.  As long as you have a basic understanding of a spreadsheet program like Excel, just follow the outline below and you will be fine.

The first step is to download your trade history from your broker into a spreadsheet.  How far back you want to go is up to you, but obviously the more data you are willing to look at the better your results will be.

The goal here is to match up your opening and closing transactions to determine profitability. The best way to do this if you are a day trader is to sort the spreadsheet by “date and time” and if you are a swing or position trader by “symbol.”

Once trades are matched you might find it helpful to categorize them as “winning,” “losing,” and “break even” trades. The “break even” category should also include trades which were small wins or losses.  Once you match them up I suggest you color code the categories, with green, yellow, and red being the most obvious choices.

Now you want to go through each category and do some analysis by looking at the following;

Asset Class – Are there certain asset classes that you do better with than others?  That you do worse with?  A trader friend of mine who used to trade numerous asset classes went through this process and found out that he did worse overall trading equities than trading forex.  He dropped stocks and began focusing exclusively on forex to the benefit of his account’s P&L.

Instruments –  Here you are looking at the instruments within asset classes you trade to see what patterns emerge.  Are you a consistent loser with ETF’s?  How about leveraged ETF’s?  Do you do better with small caps or large caps.  Do your option profits come from in the money or out of the money options?  What forex pairs do you shine at trading?

Sectors –  Maybe you will find that you do better trading consumer goods stocks than pharma stocks.  You might be the axe in the NASDAQ E-mini (tech) and the donkey when trading oil futures (energy).  If you are crushing it in the $AUD make sure you know you are trading a proxy for commodities.

Time of Day –  Most historical trade data will not only have the date but the actually time that you entered the trade listed.  See if there is a pattern that you can identify.  Often the opening and closing hours are the good for trading, while the middle of the day is not.  Are your losing trades clustered around less than optimal times of day?

Length of Trade –  This is a critical area because even with a swing or position trade that you break even on, you still have to factor in how long your funds are tied up in those trades with no return.  Many traders don’t consider themselves day traders, but will find that in the few day trades they do take, they have a better win ratio than their longer term trades.

Price –  Where is the sweet spot here?  Are you coining money it the $20-$60 range of stocks?  Are you weak in the under $10 stocks but a monster in the $AAPL and $GOOG’s of the market?

Liquidity –  You won’t get this data from your history download but it’s easy to pull up the average volume numbers on the stocks in each trade category to determine if there is a pattern related to less or more liquid issues.  You can take this one step further if you like and browse the intraday charts of these stocks in more depth.  Many stocks that have what is normally considered “decent” volume can still move in a choppy fashion with wide spreads on an intraday basis, and a 5-min charts will show you that.

These are just some suggested filters and you can use whichever ones you think are most relevant.

In the end what you are trying to accomplish is to throw out any preconceived notions you might have about your trading and let the facts speak for themselves.  If you are open to what they are saying you can then start to eliminate factors related to your losing trades and emphasize the factors associated with your winning trades.

We all know that our weekend time is very valuable and it may seem a little bit tedious at first when starting this project.  But once you get into the process I think you will quickly see the value of it, and besides, nobody says you can’t still drink while you do it.

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