Evaluating a trading system performance is not a trivial task. Not only does a trader need to know how much money the system has made but also how the system made the money. A system may be extremely profitable, but if it does not match the preferences of the trader using it, the trader may not take advantage of its capabilities and in turn be disappointed with the results. Evaluating a trading system is also necessary from a technical point of view to calculate the system's performance characteristics to be able to improve on them later. Efficiency of trading serves exactly that purpose.
Let us consider three trades (Figure 1). Let us assume that this is an end-of-day system that entered on the open on the first day and exited on the close on the last day. The results below are equally applicable to the intraday systems as well. Duration, number of contracts/shares and profits are the same for all trades.
Low efficiency points into the direction of trading performance improvement. Low entry efficiency means that all entries can be adjusted to improve trading performance. Low exit efficiency means that better exits might be possible. Trading efficiency analysis can be applied to improve both mechanical and nonmechanical trading and to increase one's profit in any market.
