Lesson 20: Capture, Aim, Manage! 3 Ways to Improve Your Trading Consistency

By Ifan Wei, Trading Coach and Strategic Day Trader Room Moderator

Are you maximizing your winners?

Are you minimizing your losers?

You may have said ‘yes' to both questions… but do you know for sure?

Remember, if you don't know exactly how you're doing, you can't possibly get more profitable, because you won't know what to fix.

First things first: your first step in improving your trading results is to figure out your batting average and your Sharpe Ratio.

A batting average is exactly what it sounds like — the percentage of your trades that make money.

Your Sharpe Ratio is your average winner divided by your average loser. If your Sharpe Ratio is above 1, your average win is bigger than your average loss. And if it is below 1, your average loss is bigger than your average win.

Let's work through some examples.

To keep things simple, we're going to use 3 trades with the following results

Trade 1 = -$100
Trade 2 = -$100
Trade 3 = +$300

So we have 2 trades with a loss of -$100 each and 1 trade with a profit of $300.

Our total Profit/Loss is +100.

Since 1 of 3 trades make money, our batting average is 33%.

Our Sharpe Ratio is 3. This is calculated as $300 (our average gain) divided by $100 (our average loss). $300/$100 = 3

Profit/Loss = +100; Batting Average = 33%; Sharpe Ratio = 3

Most new or struggling trader have a Batting Average under 50% and a Sharpe Ratio below 1.

This mean the following:

  1. They lose money on more than half their trades
  2. Their losses are bigger than their wins

A low batting average is often the result of flawed strategies or inconsistent management.

This is common for traders that don't have a solid educational foundation in trading.

A sub-1 Sharpe Ratio is often easier to diagnose and treat.

It's very common for some traders to get out of winners too early, and out of losers too late.

They usually do one of these 2 things, or both:

  1. They ignore stops and let losers grow out of control
  2. They take winners prematurely because they're terrified of reversals

So how can you improve your Sharp Ratio?

I suggest tracking 3 stats over time so you can figure out where you're going wrong, and make corrections:

1. Capture % (Actual Profit/Max Profit)

Your Capture % is the the Actual Profit on your trade, divided by the Max Profit possible on the day of your exit.

This will tell you how much of the potential move you captured.

Let's say we bought Apple (AAPL) at $160.

If we sell at $163 ($3 Actual Profit), but the stock hits a high of $166 ($6 Max Profit) later that same day, we have a Capture % of 50%.

$3 divided by $6 = 50%.

It is impossible to maintain a 100% capture rate. But if you are consistently below 50%, then you know you are capturing less than half your potential gains.

2. Aim % (Target Profit/Max Profit)

Most of your trades should have target or targets identified prior to entry.

Tracking your Aim % will help identify if you are being too ambitious or conservative with targets.

We calculate Aim % by taking our Target Profit and dividing it by the Max Profit.

Let's assume we're in Amazon.com (AMZN) from $1,000 and we are targeting a move to $1,050 for a $50 profit.

If the stock instead hits $1,060, the max profit is $60.

$50 divided by $60 equals 83%.

This is actually a very good number, because it shows we set a fairly accurate target.

3. Management % (Actual Profit/Target Profit)

Your Management % will tell you if you are overmanaging your trades.

We get this number by taking our Actual Profit on a trade divided by our Target Profit.

Assume we buy Nvidia (NVDA) at $200 with a $210 target.

If we sell at $205 for a $5 profit, our Management % is 50%. ($5 divided by $10)

If this number is below 100%, then you may benefit from an All-or-Nothing approach. Let your trade work to its target, or stop out. Do nothing in-between.

This will help you respect your targets.

Next Steps

Calculate these stats regularly, and review them at least once a month.

If your numbers are rising, then you're moving in the right direction.

You're putting more money in your pocket, and leaving less on the table.

But if your numbers are falling, slow down and figure out where you're going wrong.

About Ifan's Services

Ifan Wei offers 1:1 coaching to a limited number of traders each month.

If you think you need personalized feedback on your trading and risk management, contact [email protected] to learn more.

Ifan also created the Turnaround Trader Formula course, and is a moderator in the Strategic Day Trader Room.

About Ifan Wei

Ifan Wei attended the Haas School of Business at the University of California, Berkeley, graduating with a Business Administration degree with a specialty in Sports Marketing.

After working for the National Football League and a Big Three television network, Ifan pivoted to the equities market for a new challenge.

As a former All-American collegiate boxer, Ifan found that trading fulfilled his passion for competition and self-discovery.

He has become an expert in trading Gaps, Climactics, and Relative Strength/Weakness for profits.

Ifan provides real-time market analysis, research, and trade ideas every day in the T3 Strategic Day Trader Room.

Ifan also created a unique trading course called The Turnaround Trader Formula.

He is also a successful trading coach, mentoring traders on a 1:1 basis. Click here to inquire about a 1:1 coaching session.