Non Random

Trade-A-Stock Help: Report Card


The report card is in multiple sections - all designed to help you put your trading performance into perspective. It is relatively easy to perform well against some of these metrics, but extremely difficult to perform well against them all in a single exercise. It is harder still to perform well against all of them over multiple exercises.

Information About the Security

Here is where you get to find out basic information about the stock you were trading, such as the name, its dividend history, the time period, etc.

Performance Synopsis

This sections gives you some very basic statistics, summing up your overall performance. The term 'arithmetic' refers to the standard way of computing an average, as opposed to using a geometric mean. This means the returns (as percentages) for each trade were simply summed up and then divided by the number of trades.

Interpreting The Monkey Histogram

The histogram's x-axis is the total return percentage for the exercise. Your return is plotted as a vertical green line, showing how you did relative to the group. A line far to the right of the distribution of monkeys indicates that your trading was first, quite good, and second, not likely due to chance. A performance in the middle region may be good or bad, depending, but you cannot be sure that you simply weren't lucky (or unlucky ) if so many of the monkeys randomly trading the stock did just as well as you. Likewise, if your trading decisions lead you to be far to the left of the group of monkeys on the histogram, then you can be confident that you trade quite poorly, and are not simply unlucky.

Comparing Your Performance To Randomness

"In a bull market, everyone thinks they are a genius", is an old stock market euphemism. This is because most people have a "long" bias (they tend only to buy stocks hoping/thinking they will appreciate in price ) and almost all stocks go up during a really raging bull market. However, were you to make money in such a market, it really doesn't mean you were a good trader. Imagine a group of chimpanzees randomly trading the same market, only allowed to trade long, entering and exiting without thought. Surely many of them would perform well as well. Many would outperform you, just by chance. The only way to be confident that your decision making gives you an advantage is to measure yourself against that mass of monkeys. If your performance is consistently better than the bulk of the monkeys, then you can be confident that you are not deluding yourself or being 'fooled by randomness'. Of course, doing this is on a single stock is not enough, you need to consistently outperform the monkeys every time you go through the Trade-A-Stock exercise.

Explain how the monkey simulation works

What does ‘long’ or ‘short’ mean?

If you are a long-only trader, then consider carefully your performance against the long-only monkeys. If you tend to trade long and short, then look at the long and short monkeys. Naturally, if the stock you are trading has a very bullish year, then the long-only monkeys tend to perform better as a group, as should you.

The last key point to remember is that trading one stock for one year is not sufficient to get a real sense of your trading ability. Repeatedly use the Trade-A-Stock application, trade many stocks over many different years and evaluate your performance against the monkeys as whole. To be confident that you are trading better than a monkey, you must do better than most of them, most of the time.

Buy And Hold ( Market )	
There are a set of prominent academic theories that you cannot outperform the market by trading. If you happen to do so over any length of time, then you are just lucky. This makes it awfully difficult to prove the theory wrong.  Advocates of this theory recommend that investors simply Buy & Hold a market based index ( such as the Standard and Poor's 500 index, which is a weighted average of 500 of the biggest companies in the United States of America ) over long periods of time to take advantage of the long term appreciation in stock prices due to inflation, improvements in productivity, dividends, etc. So, to buy and hold the market means to simply buy a market-based index fund (or ETF) on day one ( of the exercise in this case ) and simply hold it until the end of the exercise. This performance serves as a good benchmark for your trading. If you can't consistently outperform simply buying and hold a market based stock, then why go through all of the effort of trading?Sorry.html

The performance chart in the report card section of the application provides a visual depiction of your return over the exercise as compared to buying and holding a market-based index stock. Ideally, the graph of your trading performance will consistently remain higher in the chart than the "Buy and Hold Market" line.


Buy And Hold ( Stock )

Imagine that on the first day of the trading exercise you had bought ( gone long ) the stock and did not sell it until the end of the exercise. This is what is meant by buying and holding the stock. Your return would vary each day directly with the movement of the stock itself. The chart in the report card section depicts your hypothetical trading performance if this were your trading strategy. This serves as yet another benchmark with which to judge yourself. You really ought to outperform this level of trading consistently to make active trading worthwhile. Ideally, the line in the chart representing your trading performance should remain well above both buy and hold lines ( the market and the stock ), steadily incrementing over course of the exercise.

What is a drawdown?

A draw down is a measure of how much money you loose (in percentage terms) during a period of trading. It is the percent retrenchment from the peak of your return to the valley. Consider, for example, that you had $10,000 to begin trading with. Suppose that you made two successful trades resulting in a 10% gain overall. You now have $11,000. Not bad. Now imagine that you made a series of loosing trades, and your portfolio equity was reduced to 9,000. You are 10% below where you started trading ( at 10,000 ), but your total amount of money went from 11,000 to 9,000. The loss to go from 11,000 to 9,000 is about -18%. This number is your draw down. While trading, inevitably, your total return will go up and down. Each time you loose money, that is considered a draw down. The draw down does not end until you earn back what you have lost. In the example above, you will need trade your equity back to $11,000 for the current draw down period to end. Assuming your equity went from 9,000 directly back to 11,000, then your maximum drawdown for would have been -18%. Inevitably, every trader goes through drawdown periods. Ideally, these periods are not too significant in terms of losses and relatively short lived with respect to time. For the purposes of the report card, your maximum drawdown is the largest drawdown you experienced during the trading exercise.

Why Drawdowns Matter

If you had $100,000, could you stomach watching it turn into $80,000 due to your trading decisions? This is a -20% drawdown. Would you still think your trading methodology was sound? Would you change your trading behavior and assume more risk in an effort to try to make up for your losses? Drawdowns are in some respects more important to watch than gains. Spectacular gains are great, but if they come with spectacular drawdowns, then you might want to rethink your strategy. A steady return profile on the report card ( a line that moves upward, smoothly and steadily making gains without big drawdowns ) is in many respects more valuable than your total return at the end of the exercise.

Summary Statistics

This table summarizes the statistics mentioned throughout the report card form, giving you a quick way of comparing your performance against the key benchmarks mentioned throughout the report. The "Probability of Win" is the ratio of how many of your trades were profitable divided by the number of trades you made. As this is a probability, the range is from 0 to 1, with 0 being the worst and 1 the best ( all of your trades were profitable ).

The Buttons

The "Review Trades" button, located at both the top of the page and the bottom, will bring you to the part of the application where you can take another look at the charts and re-analyze any of the trades you made during the exercise. The "Start Over" button will begin a new exercise and all of the data from the current exercise will be lost.

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