Automated strategies have taken a prominent role in the trading world, especially in crypto trading, where platforms and exchanges widely offer bot-building services. While developing these systems can be beneficial, it’s crucial not to rely solely on their capabilities and to implement best practices for monitoring their performance.

By tracking and analyzing these systems, developers and traders can overcome typical trading challenges while preserving the benefits of automated systems. This article will straightforwardly dive into the most relevant aspects to achieve such a goal.

Key Metrics to Track

Monitoring trades requires tracking relevant aspects and calculations of the automated system to improve and adjust them to market changes to preserve the initial goals and expectations of the strategy.

In this sense, we must periodically analyze the following metrics:

Profit and Loss (PNL)

Profit and loss are metrics that measure the performance of the equity balance of a trading account.

It calculates the net difference between the profits minus (-) losses generated during a specific trading period. It can also provide an overview of potential drawdowns.

The profit and loss metric is important since it shows the available balance indicating a decrease or increase from a starting point. 

For instance, traders can measure daily, weekly, monthly, and yearly P&L. A positive PNL means profitable trading activities while a negative PNL suggests losing their trades.

Return on Investment (ROI)

This metric measures the profitability of an investment compared to the initial cost. A higher return indicates a profitable investment and a lower result points to losing one.

It calculates the following formula:

ROI = (profit - cost) / cost.

This means an ROI of (50 - 80) / 100 will be equal to -0.375. In this case, the result is a losing investment.

Sharpe ratio

This metric calculates returns in a risk-adjust method by comparing the excess return of an investment to its standard deviation.

This calculation is as follows: (Expected return - risk-free rate) / standard deviation.

The Sharpe ratio is critical to adjust risk consistently according to the returns expected from an investment.

Drawdown

Drawdown is a crucial metric when it comes to preserving balance and reducing risks of ruin. This represents the maximum loss experienced by a trading performance from a peak point to a subsequent point.

Drawdown calculates the difference between the highest equity and the subsequent lowest equity level.

That means that a higher drawdown indicates a substantial risk of big losses, even losing an account.

For example, 

1. if a trading system has an initial balance of 10,000, then the equity increases to 10,200, 
2. And finally, it decreases to 9900,
3. it represents a drawdown of 300 or 3% over the equity, but not 1% or 100 if you calculate it from the initial balance instead of the highest equity.

From the example, we can conclude the importance of this metric to understand how the equity balance is affected by the risk of losing.

Win rate

The win rate is a percentage that reflects the total winning trades out of the historical number of trades executed in a trading period. The calculation is like:

1. Number of winning trades / total number of trades

That means that if a trading system achieves 10 winning trades out of 20 in a month, that represents a 50% winning rate. It is important to highlight that this metric has an intrinsic relation to risk-reward ratios.

A trading system could have a 70% win rate and still be less profitable than one with 50%. This is because the first system pursues risk-reward ratios of 1:2 while the second achieves 1:5 RR ratios. This, ultimately, will depend on the trading strategy.

Average trade duration

This tracks the length of time on average of the executed trades. The calculation is as follows:

ATD = Total duration of all trades/number of trades.

Longer average trades can be interpreted as a long-term trading system. Instead, a shorter average duration will indicate a system with more trading activity.

Additional Consideration For Monitoring Trades

• Trading Journal: As part of successful trading systems, creating and maintaining a trading journal is essential to record all relevant information about executed trades. Traders should take notes on entry and exit points, and highlight any adjustments made during the trade. Trading journals can provide valuable insights and serve as a starting point for future analysis.
• Trade Execution: It is important to regularly evaluate the execution of the trades to guarantee they are being performed accurately and in a timely way. Traders can look for hesitations or mistakes in the system performance and make appropriate adjustments.
• Performance Metrics: As we examined previously, there are crucial metrics to track performance on aspects such as profit/loss, win rate, average trade duration, and risk-reward ratio. These metrics will help evaluate the effectiveness of the trading algorithm and identify areas for improvement like the relation of win rates to risk-reward ratios.
• Trade Analysis: Regularly analyze your trades to identify patterns and trends. Look for any recurring issues or opportunities for optimization. This analysis can help you refine your strategy and make informed decisions for future trades.
• Risk Management: Managing the risk exposure of the system enables traders to ensure the executions are within proper limits. Here, it is critical to estimate position sizes, leverage, and stop-loss levels to manage risk effectively.
• Market Conditions: Last but not least, automated systems need to be updated on market conditions. This includes scanning economic news, market volatility, and any other factors that could influence the performance of the strategy.

Conclusion

Monitoring trades represents a crucial part of maintaining and improving automated trading systems. To achieve the best results, we defined and learned how some key metrics play a substantial role in understanding how a trading system is performing.

Metrics like drawdown or win rate alongside its relation to risk-reward ratios will provide critical insights into the aspects to adjust in the strategy behind the automated systems.

Altrady is a crypto trading platform that emphasizes the analytics of such metrics across a wide range of features as it allows the building of curated automated trading systems like bots. Enroll in a free trial account now.