Regardless of whether you are trading equities, cryptos, currencies or futures, there are some analytic criteria which are very objective and others that are more subjective.
Length of track record, police and reference checks, or strategy description are criteria which are black and white; you are either in a position to provide them or you are not.
The actual analysis of the performance data is a more subjective art form and this is what we look for:
- Blow-up factor. One can easily measure, with a high degree of accuracy, the chances of a trader blowing up their account at some time in the near future. We define ‘blow-up’ as an equity loss exceeding 35% in a single event. This blow-up is always caused by excessive leverage over risk events or over excessive time periods. The definition of ‘excessive time period’ will depend on the trading strategy. As an example, for short-term trading strategies an excessive time period may only be a weekend. An unfortunately high percentage of retail traders will have a 100% blow-up factor. This is why most retail brokers run exclusively B-book risk management models.
- Golden Touch: That unique ability to maximise profit on good trades which is so very rare amongst traders. This is what most institutional allocators are after. These traders seem to have a magic mix of instinct, timing and luck and its not called the Golden Touch for nothing. Again, this is surprisingly easy to quantify but unsurprisingly hard to find.
- Consistent, repeatable strategies: Again, it’s very easy to notice significant changes in trading patterns and professional investors pay very close attention to this.
- Correlation analysis: What’s happening with other traders, indices etc when you are profitable, in a drawdown, or flat?
- Edge: This is a very subjective and hard to measure criterion. If you can sell your Edge as an asset, it can offset many other ills.