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Do You "Benchmark" Your Trades?

One of the best pieces of advice I was ever given on trading was in regards to "benchmarking" my trading performance to the method I follow.

I was talking to a trader who had started out working for a "prop shop" in Chicago in the nineties, and who went on to start his own trading firm, which at one point employed over 40 traders in 3 cities. This guy was good; and smart. We were talking about how, even when the average trader is given a viable, standardized trading method, they have a tendency to try to override it, which inevitably leads to a less profitable performance than the method would have produced in the hands of a trader who followed her trading plan to the letter.

My friend had a solution for this when it came to his traders. He kept spreadsheets with all the signals generated by the systems his traders used. It was the trader's job to match the spreadsheet, or benchmark. The rule was that if a trader got good enough to start to beat the "benchmark" performance in first a demo account, then she was allowed to occasionally override the method in her live account. Those traders who were not able to "match' the performance of the benchmark were never allowed to deviate from the mechanized plan. Traders who did show the ability to best the benchmark were also encouraged to help improve on the system for the benefit of everyone. It was a great tool because before traders could advance they had to first follow the system/method to the letter.

Figure 1. Benchmark Spreadsheet

The idea of both having a viable method, and then keeping track of all the trades given by that method over time, to compare, or "benchmark" our own performance to, is something that all traders, and certainly all trading educators should use. The benefits of recording where the trader should have entered a trade and how to manage that trade in a manner for all to see are many-fold, but primarily this exercise will lead to improvements in your trading and your trading plan. And the biggest benefit of all will be you will see quickly whether the method you have chosen is viable or not! That alone will save you a lot of time and potentially money.

Jay Norris is the author of the best selling The Secret to Trading: Risk Tolerance Threshold Theory. To see Jay highlight trade set-ups and signals in live markets go to Live Market Analysis

Trading is a risky endeavor and not suitable for all investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.