When it comes to trading, there are a number of different indicators and metrics that traders use to measure their performance. One metric that is often used is known as a key performance indicator or KPI.
KPIs can provide traders with valuable insight into their overall performance and can help to identify areas where they may need to improve.
But how exactly can traders use trading KPIs to boost their results? In this article, we will take a look at:
- What KPIs are and how they can be applied in the trading world
- Who Trading KPIs are best suited for
- How to select the right KPIs for your trading strategy
- How to use KPIs to improve your trading results
- Common KPIs that traders use.
By the end of this article, you will have a better understanding of how trading KPIs can be used to improve your results. So, let’s get started!
Understanding Key Performance Indicators (KPIs) in Trading
What are KPIs?
KPIs are measurable indicators that assess a company’s performance against a set of business objectives, targets, or industry competitors. KPIs are used in a variety of industries to evaluate progress and identify areas in need of improvement.
Other common business KPIs include: gross profit margin percentage, net profit margin percentage, customer acquisition cost and year-on-year turnover growth.
How does this relate to trading?
Often, a financial KPI uses financial data to give insights into a company’s performance. KPIs can be closely scrutinised by investors, with the hope that they will provide insights into a firm’s dividend growth or whether purchasing shares in the firm would be a good deal.
In trading, KPIs can be used to assess the performance of a trader or trading strategy. By tracking KPIs, traders can track progress and risk management, identify areas of improvement and make adjustments to their trading strategies.
Additionally, by comparing their own KPIs to those of other traders or strategies, traders can benchmark their performance and set realistic goals for managing their portfolios. Some common KPIs for traders include:
- Number of trades per day/week/month
- Profit or loss per trade
- Strike price (percentage of winning trades)
- Risk-reward ratio
Why use trading KPIs?
Using trading KPIs, it is much easier to track the exact aspect of operational performance that is impacting your results, allowing traders to measure performance precisely and accurately, and then either tweak their strategy, make long-term adjustments or let it be.
By understanding your financial obligations and your/your company’s current assets and how to best use them, you can ensure that you don’t overspend or under-invest. KPIs offer a manageable way to improve your performance by:
- Helping traders track progress and performance
- Allowing for more informed decision-making
- Making it easier to identify areas of improvement
- Highlighting when changes need to be made.
What is a SMART indicator?
The SMART framework is a helpful means to identify quality indicators. It consists of five components: Specific, Measurable, Achievable, Relevant, and Time-bound. By implementing the SMART framework into your KPI strategy, you can be sure that your indicators are of the highest quality and will give you the best insights into your trading performance.
An example of a SMART indicator in the trading industry might be to increase market share by 5% in the next quarter.
This is specific (5%), measurable (increase market share), achievable (in the next quarter), relevant (to the company’s objectives), and time-bound (the next quarter). Here are some more examples of SMART KPIs for traders:
- To increase profit per trade by 10% in the next month
- To decrease drawdown by 2% in the next week
- To improve strike rate by 5% in the next quarter.
Who are Trading KPIs For?
What type of trader should use trading KPIs?
If you’re having problems with your trading strategy, but can’t figure out what aspects of your day-to-day operations aren’t working for you, using KPIs could be extremely useful.
For example, if you want to improve your risk management but don’t know where to start, looking at your drawdown KPI might be a good idea. If it’s consistently high, then that’s an area you need to focus on and make changes to.
KPIs can also help new traders who are still trying to find their footing. By understanding which KPIs are most important for their trading goals, they can focus on those and gradually start to improve their results. Experienced traders can also benefit from using KPIs, as they can help to fine-tune existing strategies and ensure that they’re on track to meet their goals.
In short, trading KPIs can be helpful for all types of traders, from complete beginners to experienced pros.
Do professional traders use indicators?
Many professional traders do use indicators, but not all of them do. Some indicators are more popular than others, with the most common ones being moving averages, Bollinger Bands, MACD, and RSI.
KPIs, on the other hand, can be used by all traders, whether they use indicators or not. This is because KPIs focus on operational performance, rather than price action. So, if you’re a trader who doesn’t use indicators, don’t worry – you can still use KPIs to help improve your results.
How To Choose Your Trading KPIs
Trading performance can be assessed in many ways, but choosing the right KPIs is essential to help you track your progress and identify problems early.
Using the wrong KPIs can lead to suboptimal trading results. For example, a trader who focuses on the number of trades per day may be more likely to take risks to increase the number of trades, even if it means sacrificing quality for quantity. On the other hand, a trader who focuses on the risk-reward ratio may be more likely to pass up on some good opportunities because they don’t want to risk too much capital.
The best KPIs are those that are aligned with your trading goals. For example, if your goal is to make a 100% return on investment (ROI) per year, then a KPI like profit or loss per trade would be more useful than the number of trades per day. Similarly, if your goal is to minimise risk, then a KPI like drawdown would be more useful than the number of trades per day.
The best way to choose your trading KPIs is to first identify your goals, and then select KPIs that will help you track progress towards those goals. This way, you can be sure that you are using KPIs that are relevant to your trading and that will help you achieve your desired results.
How Do I Measure & Improve My Performance Using KPIs?
- Back Testing & Journaling
One of the best ways to measure and improve your performance is to track your KPIs over time. This can be done by keeping a trading journal and recording your KPIs on a regular basis.
This will allow you to track your progress and identify any areas that need improvement. For example, if you notice that your strike rate is consistently low, you may want to focus on improving your entry strategy. Alternatively, for example if you’re a Forex trader, you may want to track your most volatile currency pairs to see if you can find opportunities to take advantage of their volatility.
Another way to measure and improve your performance is to backtest your trading strategy. This involves testing your strategy on historical data to see how it would have performed in the past. This can be a useful tool for identifying potential problems with your strategy and for fine-tuning your entry and exit criteria.
Both backtesting and journaling can be helpful in measuring and improving your performance, but they should be used in conjunction with each other for the best results.
- Intended Performance vs Actual Performance
Understanding your intended performance as your backtest results and your actual performance as your live trading results, you can start to compare how your strategy is performing in real life vs how it was supposed to perform. If there’s a large discrepancy, that’s an indication that there may be problems with your strategy that need to be addressed.
One equation to help you calculate and track your KPI rate is:
KPI = 1 X (Intended performance / actual performance)
For example, if your intended performance for your strike rate was 57% (0.57) and your actual performance is 52% (0.52), your KPI will be 91.23% (91.23), meaning you were performing at 91.23% efficiency. Alternatively, if your actual performance was at 20% (0.2) then your performance indicator would become 35.09%, meaning your performance was at 35.09% efficiency.
- Setting Your Targets
Using the right KPIs to measure each metric in your performance, you can analyse the root cause of your performance issues and then focus your targets and efforts on the areas of your performance that really need improvement.
This is an important step in the process of measuring and improving your performance, as it allows you to focus your attention on the areas that will have the biggest impact on your results.
For example, if you want to improve your ROI, you may want to focus on increasing your win rate or profit per trade. Alternatively, if you want to reduce your risk, you may want to focus on reducing your drawdown or max loss per trade.
Once you have selected the KPIs that you want to focus on, you need to set targets for each one. These targets should be realistic and achievable, and they should be based on your historical performance.
How often should I review my trading KPIs?
The frequency with which you review your KPIs will depend on your goals and the time frame in which you are trading. If you are a day trader, you may want to review your KPIs on a daily basis. If you are a swing trader, you may want to review your KPIs on a weekly basis.
We recommend going no longer than one month without reviewing your KPIs, as this will allow you to identify and address any problems in your trading strategy before they have a chance to impact your results too severely.
3 Key Examples of Trading KPIs
Now that we’ve covered the basics of KPIs and how to use them to measure and improve your performance, let’s take a closer look at some key examples of trading KPIs you could track.
One important KPI in trading is your strike rate. If your strike rate is below your targets, you may be taking trades you shouldn’t be taking or missing out on trades you should be taking.
Your target strike rate will depend on your strategy, but a good starting point is 50%. If your strike rate is consistently below 50%, that might be an indication that you need to reconsider certain aspects of your trading strategy. To improve your strike rate, you may need to focus on entry criteria or risk management, such as developing your stop-loss strategies and sticking to them.
If your current ratio of risk reward is below your targets, then you are taking all of the trades you are meant to take, but you may face problems when it comes to holding trades to their intended target. The average number of pips gained per trade needs to be higher than the average number of pips lost per trade in order for you to be profitable in the long run.
Your target risk reward ratio will again depend on your strategy, but a good starting point is 1:2. This means that for every pip you are willing to risk, you should be looking to make two pips in return. If your current ratio is below 1:2, then you may need to focus on your exits or position sizing to see improvements.
Net Profit Margin
Profitability is the bottom line for any trader, and as such, your net profit margin is one of the most important KPIs you will track. Your net profit margin is a measure of how much profit you are making on your winning trades relative to your losing trades.
How much revenue you need to generate in order for your business to be profitable will depend on your operating costs, but a good starting point is 50%. This means that for every dollar you lose on a trade, you need to make $1.50 on your winning trades in order to meet your business goals.
If your current ratio is below 50%, then you will need more money to make up for your losses on losing trades. To improve your net profit margin, you may need to focus on your entry criteria or risk management strategies.
Where Can I Find More Trading Strategy Insights?
Now that you know what KPIs are and how to use them, you’re well on your way to becoming a successful trader. If you’re looking for more insights on trading strategy, be sure to check out our Youtube channel, where experienced traders regularly share their insights on the market, trading as a career and trading strategy development.
For professional guidance on how to develop and improve your trading strategy, why not join one of our Professional Funded Trader Programmes? With a live funded account of up to $40k, you can get started trading with real money and receive one-on-one mentorship from some of the best traders in the industry, learning how to develop and execute a profitable trading strategy with ease.