Chuck LeBeau developed a powerful analysis tool for traders called the exit efficiency index. Briefly, it’s an analytical process to examine the quality of your average trade exit within a reasonable timeframe around your actual trades. Understanding the technique will help you tune your system to typical market conditions where you are seeking to exploit your edge.
In a nutshell, you take your actual profit in each trade and divide it by the perfect exit from a timeframe that represents twice your actual trade to come up with a score between zero and one. If you can reliably get 30 to 40% of the perfect trade in your normal timeframe then you’re doing well.
With a few refinements it is possible to examine the quality of the entry as well as the quality of the exit. In this way you can consider how well tuned your trading system is to the general market conditions you seek to trade.
With another refinement you can look at the worst possible exit in the same timeframe to determine how well your profit preservation and capital preservation exits are protecting you against losses.
The same refinement will also show you if there are profit opportunities by reversing your trade direction and going the other way when the first trade is over.
Maybe the hardest piece of analysis to do is to look for opportunities on the other side of the trade when you have a positive expectancy system. It would not normally occur to you to see if you are missing profits by trading in exactly the opposite direction, when you have a system that makes money.
By doing so, however you may be opening yourself up to some real surprises concerning profit opportunities when you normally trade. You may discover that you can trade both sides of your idea in sequence. An example of this would be to stop and reverse instead of just stopping out of your trade.
I have found that there are certain market conditions favor stop and reverse strategy, while others it is appropriate to simply stop and scan for new opportunities.
By examining your trading statistics from all angles you’ll improve your bottom line as a trader.