Consider the following trade: bought 100 shares of stock XYZ at $100 per share sold 100 shares of stock XYZ at $120 per share Profit = 100 shares * ($120 - $100) = $2000 Was it a good trade or a bad trade? In my assessment, the answer to this question depends on what happened while the trade was open. Consider two scenarios: Scenario A: After you bought the stock at $100, it dropped to $50, and then recovered to $120 at which point you sold it. Clearly, even though you made profit, this was a bad trade, because you bought way too early, and suffered a severe ($5000) intra-trade drawdown (i.e. unrealized loss). Scenario B: After you bought the stock at $100, it dropped to $99, and then steadily rallied to $120 at which point you sold it. Clearly, this was a good trade, because you bought close to bottom, and had a very small intra-trade drawdown ($100). What I'd like to know how to best quantify the difference between scenarios A and B. I suppose I am looking for something that could be called a "trade quality" number. One thing that comes to mind is what's known as "APD" (average profit to drawdown). If not APD, what metric do you use to assess the quality of your trades?
A quality, good, trade is a trade in which the trading plan is followed. Your concept of "APD" misses... if a trade plan allows and/or expects a 50% or whatever drawdown, the trade is of good quality within those parameters. The same applies on the other side, the exit with profit. In the example was $20 a minimum profit, a maximum, a bail based on time, news, technicals, price action, too much alcohol at lunch, or something else? Not everyone, nor every trade uses RRR (RiskRewardRatio). A quality, good, trade is a trade in which the trading plan is followed. This includes losing trades as well. The parameters of "good" are researched and determined by the individual trader and/or automation developer. Was the plan followed is the metric. You either understand and appreciate the beta (parameters) or you change them.
This generic example of a trades tells you nothing. Now, if there was a stockchart and a ticker given, one would be able to determine where you entered and if it was a good trade. Even bad trades can end up profitable but, more a function of luck than your abilities as a trader. What determines if you are a good trader is if you: 1) practice good risk management, 2) maintain a trading journal, 3) having a trading plan, 4) an understanding of trends and following it, 5) having a trading edge. If you are trading with a negative expectation, you will lose your monies!
No, risk/reward ratio. If the risk of loss is $50 then reward should be at least that much to compensate for the loss, 1:1. This is how some traders trade and evaluate the quality of their trades, by risk/reward ratios.
That is a trading practice called bottom fishing and top picking, not an evaluation of trade quality. In reality, there is no way of knowing where a true bottom/top is until after the fact and by that time, you could've blown your account already if there was no effective stop-loss. I agree with @tiddlywinks, the quality of a trade should be evaluated by how well it adhered to a trading plan. If a trading plan is found to be not reflective of true market condition, then it's the trading plan that needs to be revised if necessary, NOT the trade. Always make a habit of changing a trading plan and never individual trades. That's how one makes consistent profit.
It is good to know the MFE/MAE ratio from trade entrance based on both time and volume/shares traded. Once you have this information you can check it against random entries to make sure your entrance is better than random.