Earlier in my career, a very successful and long-tenured trader told me that a good risk management habit to get into was charting my equity. Even today, many bull and bear markets later, I still think this is a very underutilized tool. Most traders just look at daily net changes; few go through the trouble of charting the equity each day. You will be surprised to learn that it will look like any other stock or index chart. Each trader is susceptible to mood (and therefore equity) swings. During my years as a trader I spent each day adding my profit/loss to my equity curve. At the end of each review period, which we did monthly, these equity charts were reviewed by other colleagues of mine to give me unbiased feedback as the appropriate amount of equity that I should be trading with, as well as other random ideas. My peer review was prone to abnormal swings, both positive and negative, during this process in the event of them occurring.
Now, this process may not necessarily be the process that will work for you. However, charting your equity each day will bring a wealth of useful information to you. You will notice trends in your trading that can be further analyzed by using a diary or journal. It will graphically depict danger signs in equity swings. Sometimes the dollar amount is not as important as the percent of equity fluctuations. The daily equity chart will illustrate how you are truly handling risk. By making this routine, this chart over a decent sample of time should tell you more about your trading then you thought you even knew outside of the common trader thought, “I am up $X or down $Y.”
I can also tell you with conviction that the “great traders” will not show large fluctuations in the daily graphs. My relationship at this point with many successful types of traders (equities, futures, commodities) has allowed me to compare my results with those of others that practice this technique. I am very fortunate to have these colleagues to compare myself to. In this pool of traders there is one person, whom I will leave unnamed, that is profitable year after year and returns that range from 35% a year on the lower end to hundreds of percent on the high end. In all of his greatness this trader, to this day, still says to me without fail, “Take care of your losses, and the profits will take care of themselves.” You may have read about him in one of my earlier posts Meet Trader X. To this day, this trader still posts his equity charts on his office wall everyday and for years has urged his other colleagues to do the same.
