Back in a prior life, I used to work in credit risk management, where we would analyze and implement account management strategies on loan portfolios that were billions of dollars in size. It's not as exciting as it sounds, since managing a big bunch of loans would be similar to driving a big 18 wheeler, vs. trading at a hedge fund which would be like driving a Ferrari.
Through dealing with the analysis of large numbers, I learned that it's not necessarily the absolute value that's important. Instead, many of the metrics for comparison were based on basis points or percentages. So as I began down this journey of learning to trade, I wanted to make sure I kept the proper perspective on my progress, and to also find a way to minimize my overall personal financial risk.
Primary way I measure performance
First, I knew the absolute dollar amounts that I would be trading would be considered random daily P&L noise for experienced traders. So I wanted to measure my key performances, such as P&L and risk size, by basis points of my portfolio or the R-Multiple. I find this to be the purest way to measure your performance, especially if your portfolio is small. This way, as I scale up in size, it's not whether I'm betting $50 or $5000 per trade, it's just the same 'ole 50 (or whatever) basis points of my portfolio.
Yes, I do admit, for all the work I do, when I look at the absolute dollars I make or lose, it sure doesn't seem like much. But measuring your performance based on percentages helps to keep a better perspective on how you're truly doing.
You'll likely wreck the car (or your account)...
Second, I wanted to make sure that I'm not putting too much money on the line as I learn. When a teenager is just learning to drive, there's a good possibility that they're going to get into an accident and wreck the car. So even if you could, responsible parents just don't go out and buy a Ferrari for their child's first car!
Although I could open up an account significantly larger, it just would not be financially responsible. I know from past experiences that I will initially lose money. So my intention is to minimize the absolute dollar size of my account, so that I can use the $25k minimum pattern day traders requirement as my backstop to force a time-out. This is similar to how you would get locked out of your account at a prop trading firm after you exceed a certain loss for the day.
So what now?
After such a volatile day yesterday where I was very lucky to end the day slightly profitable, I was hoping to take it a lot more easy and be much more focused today. But I learned quickly that trading with a lack of sleep can be very hazardous to your trading P&L. That's no excuse for my lack of discipline. I wasn't so lucky today with a SODA trade to bail me out. I exceeded my $25k backstop oh so slightly, so now it's time to take a break, spend extra time evaluating what I did wrong, dust off, and refocus on my goals.
In the meantime, I'll take the humiliating and embarrassing action of sending a little more money to unlock my account. Nope, I admit, this isn't the first time I've had to do this in the past 4 months. I also admit, it's not like I really blew up my account, but it sure does feel like that to me. However, this is the first time I'm telling the world of the shame and disappointment I feel. This will motivate me to do better. On the bright side, I look forward to the days when I'll be withdrawing money from my account on a regular basis.