Why Your Equity Curve is So Important to Your Trading Results

You cannot improve what you cannot measure. It goes without saying that for you to get better as a trader then you must keep track of your trading performance.

One of the most visually rich and important elements to measure is your equity curve.

A famous gold prospector was once heard saying, “There’s gold in them hills over there.”

But when it comes to Forex trading (or trading any financial instrument), your ‘hill’ is your equity curve.

Literally.

Your goal is to make sure your ‘hill’ is one of those seemingly never-ending ones that keeps stretching higher and higher.

Without telling you a thing about each person’s trading style, would you be able to guess the potential of each of the traders below based on their equity curve?

 

Trader A

Trader B

While we cannot foresee the future, we may be able to guess that Trader A is starting his/her journey and a little bit erratic with his/her results. We may even go as far as to say the next few months or longer will be tough for Trader A.

Whereas we might suggest, Trader B has a more defined trading system with solid risk management built in, based on the smooth equity curve. We might also assume, given how smooth the equity curve is, Trader B must be trading multiple systems and relying less on one hit wonders to boost his/her account.

Your equity curve is such a vital trading statistic for you to measure at the completion of each trade.

It is your visual representation of how well you are doing or not.

Here are the top 3 reasons why recording your equity curve is so important:

1. You come face to face with your reality

Your equity curve is your reality. It is the accumulation of your wins and losses up to this point in time.

Nothing is more confronting than seeing the results front and centre, day after day.

For those going into drawdown, it is never nice.

Your equity curve can help you come to the reality that you are currently on a losing streak and it might be time to reduce your risk.

2.Trading is about your numbers

In any trading day, week or month, you are going to have a series of winners and losers.

Your equity curve allows you to step back a bit and smooth it all out to see the trajectory of your trading results.

By knowing your numbers, you will have confidence during those losing streaks when everything seems to be going the wrong way.

Your equity curve, along with your average win, average loss, expectancy and profit ratio, allows you to confidently take the next trade, even after a series of consecutive losses.

3. You can plot a moving average of your equity curve

One powerful method professional traders use to help guide their position size is to plot a 20 period moving average of their equity curve.

You’ve no doubt heard of a moving average crossover system where you go long when the 5-period moving average crosses over the 20-period moving average and go short when the five crosses below the 20.

But what some traders do is start reducing their position sizing as their equity curve drops below their 20-period moving average.

You may be risking 2% per trade normally but cut back to 1% risk per trade when your equity curve is sitting below the 20-period moving average of it.

Professional traders track their equity curve and a whole host of key reporting metrics including those mentioned above.

The easiest way to get started is to plug your trading results into the world’s leading A.I. powered analytics platform for traders.

PsyQuation provides you with the most visually powerful, informative intraday and end of day trading statistics you can get your hands on, and it is free.

Click the links below to get started and take your trading to the next level.