How to Benchmark Your Day Trading Performance - dummies

How to Benchmark Your Day Trading Performance

To understand your performance numbers, you need one more step: what your performance is relative to what else you could be doing with your money.

Day Trading performance relative to an index

The most common way to think about investment performance is relative to a market index. These are the measures of the overall market that are quoted all the time in the news, such as the Standard & Poor’s 500 and the Dow Jones Industrial Average. Not only are these widely watched, but many mutual funds and futures contracts are designed to mimic their performance.

That means investors can always do at least as well as the index itself, if their investment objectives call for exposure to that part of the broad investment market.

One big problem is that day traders often look at the wrong index for the type of investment that they have. They’ll compare the performance of trading in agricultural commodities to the Standard & Poor’s 500 when a commodities index would be a better measure. And the indexes assume that the assets in question are held for the long haul rather than traded every few minutes or every few hours.

If you aren’t sure what index to use, check a financial website such as Yahoo! Finance or check out the Market Lab section of either the print or online edition of Barron’s a weekly financial publication put out by Dow Jones & Company, the same people who publish The Wall Street Journal and the Dow Jones Industrial Average.

Both of these have lengthy lists of different stock, bond, and commodity indexes covering the United States and the world. You can find the one that best matches your preferred markets and use it to compare your performance.

In some cases, your trading practices may overlap more than one index. If so, pick the indexes that are appropriate and compare them only to those trades that match. If you trade 40-percent currencies and 60-percent metals, then you should create your own hybrid index that’s 40-percent currencies and 60-percent metals.

Performance relative to your time

Instead of day trading, you could put your money in a nice, simple, index mutual fund and take a regular job. If your hourly wage from day trading is less than what you can earn elsewhere, you may want to consider doing just that.

Of course, there are benefits to working on your own that don’t often show up in your bank account. If you enjoy day trading and if you make enough money to suit your lifestyle, by all means, don’t let the relative numbers stop you.

Performance relative to other traders

You probably want to know how you’re doing relative to other people who are trading. However, you’ll probably never know. No central repository of trading returns exists (although wouldn’t it be interesting if the brokerage firms or exchanges could report that?). Some academics have done studies of day trading returns, but they are working with historic data stripped of customer information.

On message boards and at get-togethers, you may hear other traders talk about their returns. Take this information with an entire box of salt. Some people lie. Others exaggerate or obfuscate. Someone who has average or poor returns may want to lie to try to impress others, while those with great returns may not want to call attention to their prowess.

Ignore whatever other traders tell you about their returns. If you are satisfied with your performance relative to your risk and your time, nothing else matters.