Questions you should be asking during Analysis of PnL variance.

  • Did I make money? This always must be the first question and the answer must always be I need to change something in my approach if I am not making money. The rest of the questions are all focused on identifying what it is you need to change.
  • Did all my money come from one trade or was it pretty evenly distributed? Did I just get lucky on one trade that went my way or were profits were evenly distributed, implying my entry system is consistently giving me good trades.
  • On my winning trades how far did the market move against me before it kept going in my favour and didn’t look back? This is known as the drawdown or how much the trade is underwater before it turned pnl positive (pnl = profit and loss). If you had a big draw down how many times could you sustain that loss before you wiped out your whole account equity. No one ever ‘knows’ the market is going to come back so if you have a lot of big draw downs and are not implementing your stop losses then you’ll probably wipe out sooner rather than later.
  • Same question for the losing trades, how big was your draw down? The emphasis on the losers however is to find common elements to how these trades behave.
  • Did all the trades that were underwater or losing money after two days or three days remain losers until you closed them out? If so, would cutting the losing trades earlier result in smaller losses and make your system more profitable?
  • When you look at their characteristics or a chart of the winning trades especially in the initial stages and look at the charts of the losing trades what are some generic features in common and some differences between Winners and Losers? A friend once mentioned to me for all his trades that were underwater after 3 days remained losers. So he started cutting all trades that were underwater after 3 days and his profitability improved.
  • Did many trades that were winners become losing trades? So you got into the trade and then initially moved in your favour only to move against you by 3% and start costing you money. Did any of the winning trades have a big move against you in one session? If not then this should become one of your exit signals.
  • When the trades went from being winning trades to becoming losing trades, was there anything to distinguish that process? Did one of the moving averages turn? was there a crossover of a fast moving average over a slower one? or was there at least 3 out of 8 technical indicators you follow showing negative signs? Was the volatility in the last 10 sessions much higher than usual or was it true that volatility was higher on your winners?

Again you are just looking for common characteristics amongst your losers that distinguishes them from your winners.