Every now and again it is worth reviewing your performance against some form of benchmark. Managed/Superannuation funds measure themselves against an index such as the All Ords and fail repeatedly to even match it and traders do the same thing. However, this does raise the question as to whether measuring active performance against a passive index is a fair comparison. But actively traded indices are few and far between so traders are left with trying to find another measure to compare themselves to. In all honesty, I think this is a somewhat fruitless endevour given the lack of a standardised benchmark. My preferred approach to look at how the system as a functioning entity did in identifying outlier moves within the markets that I trade. This is a measure of both the effectiveness of the system in identifying potential trades and the efficiency in my psychology with regard to taking these moves.
Below is a table of the top performers on the ASX for the past three months.
When reviewing these sorts of lists over the time frames I trade I ask two simple questions.
- Did the system see the trade – that is was a signal that I could have taken generated.
- If a signal was generated and I did not take the trade why did I not take it?
We do always have to inject an element of rationality into this sort of analysis in that we are never going to get the maximum returns that are hypothetically possible. But we can always look at something and ask the very hard question of why did I not at least participate in some of the rallies.
In my case, the one that stands out is RTR which my system saw but I did not take – I had just enough available heat to squeeze it in but for some reason passed on the trade. What is interesting is that it is difficult to find a tangible reason as to why I didn’t take the trade – there is nothing about it that stands out as being difficult as the portfolio that trades this segment of the market has stocks in it that look the same. What is does prompt in me is a need to stop being blase about the trades I do and don’t take and go back to recording in detail the reason why I might reject a candidate that otherwise appears to be perfectly reasonable.
I find leaving money on the table to be a great motivator for behaviour change.