My goal for swing trading when I am trading small accounts (like $10,000) is usually 200% per year. For larger accounts it is usually 50-100% per year. My money management is more conservative on larger accounts than smaller accounts. And I never trade stocks with more than 2-to-1 leverage on overnight positions. There may be times where I go just a little over 2:1 - like if I put on positions that are fully margined and my equity goes down and pushes the leverage up a bit.
After every trade I usually review the trade and see the strong and weak points of the trade. This rarely is related to the profit of the trade. It has to do with how well the trade was carried out. Broadly speaking, I usually look at how good my entry was and how good my exit was. There are other factors as well. For instance, if I make a mistake analyzing the company then I will note that. My analytical skills far surpass my raw trading skills so there are less of those examples noted.
Many times this post-trade analysis will be a quick one sentence summary noting I had a good entry and exit and followed my plan. If I happen to mess up a trade really badly, or a set of trades really badly, I will do a more intensive post-mortem analysis and make notes of traits I have that need improvement.
I usually look at my performance, from both a financial perspective and a behavioral perspective, on a semi-annual basis. I don't do it quarterly because I believe that 3 months is a bit too short of a time frame. After all, if I have a bad month then I am almost sure to have a bad quarter. I want to choose a time length to be long enough so that I can have some bad trading moments incorporated into my results without making them skewed because bad trading moments are part of being a trader.
When it comes to reviewing my performance it is vital to look at how I handled my trades by monitoring the behavioral aspects of trading. Some of the behaviors are: getting faked out of trades, getting scared out of trades, having the patience to stay in trades, managing risk, getting into a stock I shouldn't have, mistiming an entry, or being overconfident in general.
One thing I do is break down the trades into different categories and analyze each category of trades. One category is long vs. short trades. Shorting has different dynamics than buying so I want to see how well I am doing when it comes to shorting.
Another category is day trades vs. overnight trades. Sometimes day trades end up not making me that much money but distract me and tie up capital.
Another category is trades that I added on to. In other words, stocks that went down and I bought more. I need to analyze whether or not there was a net benefit in doing this. These considerations are also in addition to the risk considerations of adding onto trades.
At the end of the year I also look over all my trades one by one to see what things I was doing right or wrong. Looking at all the trades at once helps you see the holes in your results. It's time like these that I realize that I sold a few too early or some other hole.
My trading metrics
One of the most basic metric I use to analyze my results is "Profit Factor." Profit Factor is calculated by dividing the total amount of profit from profitable trades by the total amount of losses from losing trades. It tells you, "For every dollar lost how much did I make?"
For example, if I made 4 trades and the results are +$2,000, -$1,500, +$1,300, and -$150, then winning trades have a total of $3,300 profit and my losing trades have a total of $1,650. If we divide $3,300 by $1,650, we get 2. A ratio of 1.0 means that you are breaking even (for every dollar you lose you make a dollar). It is impossible for the ratio to go below 0. My goal is usually around 2.5. When you are up to 2.0 it means you are trading pretty good. Around 3.0 is very good. And anything in the 4.0 to 6.0 range is exceptional, but it is very hard to keep it up that high for any length of trades.
The key factor when it comes to having these trades mean anything is the number of trades - not the length of time. You will want at least 4 or 5 trades before you really even calculate the ratio and you will want at least a few trades from each category of profits and losses. You don't want to have a couple of $1,000 gains and only have a $100 loss and brag about having a profit factor of 10. There have been times where I have gone a month or two and only made 1 or 2 trades because the market simply wasn't offering any really good opportunities.
You also want to wait until you have logged a couple of "typical" trades. For instance, if you are a swing trader who is looking for a 10% gain while limiting yourself to a 7% loss and you have only booked a couple of small losses (2% to 3%) but you know you will be taking a decent-sized loss sooner or later, then you may want to wait until that time comes.
Profit Factor is not a popular indicator but it is a great metric because it is a measure of trading efficiency. Its use was popularized by systems traders who use software to back-test trading strategies on historical data to tell them how well the strategy worked. Profit Factor is one of the common statistics used to judge results, and anyone who has regularly reads Futures Magazine or Technical Analysis of Stocks and Commodities will be familiar with the concept of Profit Factor.
The profit factor, for those who like to crunch numbers, can also be calculated by dividing your average $win by your average $loss. I don't calculate average dollar wins and losses because as your capital grows the "norms" for these numbers change with it.
As far as metrics for pure risk, the one I consider most important is maximum drawdown. This tells me the most (percentage-wise) that I was down during the year. This metric correlates with my philosophy about risk. I don't have an interest in "average" risk. Risk, to me, is only relevant at its worst.
A lot of my risk metrics are calculated using closed profits only. This, of course, has the obvious drawback of ignoring times when I was down a lot of money on a trade but managed to make it back. One thing I need to do more is start calculating risk on an end-of-day (or ideally, real-time) basis. When I am going through a particularly turbulent period I do actually calculate my portfolio risk on a day-to-day (and sometimes intra-day basis) but as a matter of course, I don't.
A note for those who may be wondering: one metric that I don't use is Winning Percentage. Winning Percentage is one of the most over-rated and misused trading metrics. Most beginners come to the table with the misconception that making money in the stock market is about being right. It isn't. It is about making the most amount of money when you are right and losing the least when you are wrong.
But beginners believe that a higher winning percentage is better. This isn't always the case. For example, I expect most successful trend traders have winning percentages that are less than 50% (probably between 30% and 40%) because successful trend traders take many small losses while waiting to get into a large trends that will make up for those small losses.
And there are plenty of swing trades out there who have 50% winning percentages that have an average gain that is twice their average loss. In fact, if I had the choice between investing money in this particular swinger trader or another trader who had a 67% win/loss ratio but an average trade equal to their average loss, then I would choose the first trader because he understands the simple concepts of successful trading, which is to let your profits run while limiting your losses.
The only time I look at the percent of winning trades is if I am going through a point where I am making a lot of losing trades. Then I might take a look to see if something in my trading mechanics is wrong, like loosening up my strict entry discipline or not handling trades correctly after I put them on or something else. Otherwise, I don't really care.