The truth your equity curve reveals about your trading process

trader equity curve

Build Your Equity Curve

Look at your equity curve like a price chart. You want the slope to be positive and upward. What the trajectory? Your equity curve can help you target your goals.

Start by putting all your trades and the costs into a spreadsheet:

Column A is today’s Date

Column B – Entry

Column C – Exit

Column D – Commissions

Column E – Fees

Column F – Final Balance

Then you can chart the last column against the Date – Columns A and F. Do that every day and update the chart. You can study the results at the end of the month.

Your Equity Curve shows you the efficacy of your process and trading rules. What does it tell you if you are afraid to create one? Not worth your time? My guess is that the truth might be hard to acknowledge and we can bullshit ourselves to eternity.

The first step in getting healthy and making better trading decisions is to discover your truth. Nothing illustrates a failed or successful attempt at trading better than an equity curve. It will also help you calculate what your time is garnering you from all your efforts. If you want to increase your hourly wage, then increase your holding period.

Drawdowns are not failure – they just delineate those times when your system was out of sync with the market. That’s going to happen from time to time.

I find that day traders are fearful of this process. Position traders will find that their equity curves make the biggest jumps.

The Best Trading Backtesting Software

Most backtesting software and simulators calculate your equity curves for you. Just make sure that the backtests can be done at the portfolio level (like Mechanica Trading or Trading Blox), not on one instrument at a time.

With the former, you’ll see your how your portfolio reacts to the market changes and the net effect of each instrument that you trade. Not everything is going to move in lock-step fashion, so you’ll want to measure and study your open trade equity, as well as the effect of the new trades that you put on.

Conclusion

Let the market and leverage work for you and you’ll see those efforts and results on your equity curve. If you’ve backtested your rules, stick with them as you’ll trade yourself back to new highs by sticking to your rules.

If you want to see the best results, take your winning trades home with you overnight and over the weekend.
That process will help you equity grow the fastest.