Once you have built a solid foundation for your trading method, you can start looking into the nitty-gritty. During the last lesson, we showed you how to use the Trade Management feature to improve your in-trade decisions. Today, we will look at order optimization and how to improve the way you set orders to, potentially, improve the size of your winners and also your winrate; that’s were the Edgewonk Drawdown and Updraw statistics come in.
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Getting started with the right journal input
To activate the Updraw and Drawdown in your journal, you have to make the right trade input. When you enter a new trade, you can enter the highest and lowest observed price during the duration of your trade in the field “Price Behavior”.
Tips for entering the right values
There are two commonly asked questions about the data input we will address now:
1. Does the input change for buy and sell trades?
The answer is no. Regardless of whether you have a buy or a sell trade, you always enter the highest and the lowest absolute price for the trade. Edgewonk will then adjust the calculations accordingly.
2. How long do I have to observe the price before I can enter the value?
Here it gets a little more tricky. The basic approach is it just to track the highest and lowest price during the duration of the trade.
You can choose to track the highest and lowest price after you have closed a trade. Here it is important to establish a rule how long in the future you will watch price so that your input is always the same. For intraday traders, waiting a few hours and swing traders can decide to wait 1-2 days.
The Updraw measures how far price has moved in your favor and how close price came to your take profit order.
An Updraw between 0% and 100% means that price did not reach your take profit order. An Updraw of 50%, for example, means that price came halfway to your take profit order.
If you chose to track the highest and lowest price into the future, you could get Updraw values larger than 100%. This then means that price overshot your take profit order – more later.
The Drawdown measures how far price has moved against you and how close price came to your stop loss order.
A Drawdown between 0% and 100% means that price did not reach your take stop loss. A Drawdown of 50%, for example, means that price came halfway to your stop loss order.
If you chose to track the highest and lowest price into the future, you could get Drawdown values larger than 100%. This then means that price overshot your stop loss order.
Tweaking your trades with the Trade Analytics
To analyze your Updraw and Drawdown values, you should go to the Trade Analytics tables in your Edgewonk trading journal. Especially the filter for Winners and Losers can give you unique insights:
(1) For Winners:
- If you see that your Updraw value for winners is significantly greater than 100%, it means that you are setting your take profit too conservative and you could potentially improve your performance by choosing a wider take profit.
- If you see a low Drawdown on your winners, it means that price did not move much in your favor and that you have probably set your stop loss too far away. By using a smaller stop loss, you could potentially increase your Reward:Risk ratio and the size of your winning trades.
(2) For Losers:
- If you see that your Updraw value is relatively low for losing trades, it means that price does not move a whole lot in your favor. Here it might be necessary to dig deeper and analyze how you choose your entries and why there is no follow through. On the other hand, if you see that the Updraw is below but close to 100%, it means that price is coming close to your take profit but does not make it all the way. You might be too optimistic with your take profit targets and the price can’t reach them.
- If you see that your Drawdown is just slightly above 100%, you could potentially avoid some of your losses by choosing a slightly larger stop loss because you just get barely taken out by price. However, make sure that your overall Reward:Risk ratio is still acceptable if you use a wider Stop-Loss.
Word of caution – Tips for a better performance analysis
Making your analysis based on a large enough amount of trades is very important here to make the correct conclusions. We placed the Trade Management lessons relatively at the end of this course to give you the chance to collect enough data so that your performance analysis has enough input.
Also, we highly recommend analyzing setups and instruments separately because your stop loss and take profit approach usually vary and things like momentum and volatility also differ among setups and instruments. Thus, you should always analyze Drawdown and Updraw individually and adjust your order placement very specifically.