The fine print of trading and investing

Quiz · Risk Management · Intermediate

Skill or Dumb Luck? A Quiz on Judging Trading Decisions

Judging trading decisions by their results alone rewards luck and punishes discipline. Grade each trade below on what was known when you placed it.

AI-assisted, reviewed by the The Margin Report human editor: John Todora → Marked as you go Published

What it tests

Whether you can grade a trade on its process instead of its outcome, measure results in R and tell a real record from a short run of luck.

Trade 14: +$900. Stop ignored, size doubled. A journal entry like that records a win and a warning in the same line, and the account statement will only ever show the first half. Markets pay out on outcomes, and a single outcome mixes skill and luck in amounts nobody can separate by looking at one trade, so the useful question after any trade is whether you would make the same decision again with the same information. Grading that way changes what you repeat. A rule break that paid is still a rule break. A clean loss earns credit.

Keeping score in R

Dollars make a big trade look good and a small one look irrelevant. R puts them on one scale: the result divided by what the plan risked.

In dollars the three trades broke even. In R they made a unit. The loss that erased the gain came from a trade sized at twice the others, so the setups did their job and the leak was in the sizing, which only shows up when you keep both columns side by side and ask why they disagree.

How to use the questions

Each scenario describes a trade and its result. Grade the decision first. Judge it on what was known when the order went in. Look at the result second. Some questions ask for a sum in R, so work it on paper.

After a wrong answer

A miss usually means the result did the grading, the exact habit a journal kept in R is meant to break. Cover the outcome with your hand and grade again. If a sizing question caught you, the column conviction makes a terrible position size makes the argument against trading bigger when you feel sure. The lesson on grading your passes, in Hands Off the Buy Button, applies the same scoring to trades you skipped, a half of the record that is easy to leave out, and Poke a Hole in the Plan tests the rules you would grade against.

Pick an answer to mark it

The questions

  1. The situationOn a tip, you bought a stock at three times your usual size and set no stop. It rose, and you sold for a $2,400 profit.

    1How should the journal grade the trade?
    Show the answer

    B: A rule break with a lucky result, so the process gets a poor grade. The trade broke the sizing rule and had no stop, so the loss had no limit. It happened to go up. Grading it by the $2,400 teaches you to repeat the behavior, and the same behavior on a trade that falls can do damage no single win repairs.

  2. The situationYou planned an entry, a stop below the swing low and a size that risked 1% of the account, $400. You followed the plan exactly. The stock fell to the stop and you lost $400.

    2How should the journal grade the trade?
    Show the answer

    A: A sound trade with a losing outcome, since the plan was followed and the loss was the planned size. The loss was -1R, exactly what the plan allowed. A good process still loses on some trades, and those losses are the cost of taking the setups that win. What deserves a poor grade is a loss larger than planned, or a trade that broke the rules.

  3. The situationYou start a new strategy. The first five trades produce four winners and one loser, and you are ready to double your size.

    3What do five trades tell you about the strategy?
    Show the answer

    D: Very little, since five results can easily come from chance. Five trades is a tiny sample. Even a strategy with no edge that wins half its trades at random shows four or more winners in five about 19% of the time: 6 of the 32 equally likely win-loss sequences. A record needs many trades under unchanged rules.

  4. The situationYou passed on a setup because the company reported earnings inside your planned holding period, and your rules say pass in that case. The stock gapped up 15% after the report.

    4Was passing a mistake?
    Show the answer

    C: No, since the decision was sound on what was known, and the gap could have gone either way. Hindsight judges the decision by an outcome nobody could see in advance. The rule exists because a report can gap the stock in either direction, past any stop. One gap in your favor does not show the rule was wrong; a long record of skipped setups, graded fairly, would.

  5. The situationYour usual risk is $500 a trade. After a winner that made $1,500, you plan to risk $1,000 on the next trade while you are on a hot streak.

    5What is wrong with the plan?
    Show the answer

    B: It ties size to the last result, which says nothing about the next trade, and it doubles the next loss to $1,000. The last trade's result has no bearing on the next one's odds. Doubling size after a win means the next -1R costs $1,000, two-thirds of the gain, and the profit in the account is your money like any other. Size should come from the rule.

  6. The situationTrade A made $600 and had risked $200. Trade B made $900 and had risked $900.

    6Measured in R, which trade was better?
    Show the answer

    A: Trade A, at 3R against 1R. Trade A returned $600 on $200 of risk, which is 3R. Trade B returned $900 on $900, which is 1R. Trade B made more dollars because it risked far more. R shows how well each trade paid for the risk it carried.

  7. The situationA hypothetical journal shows that 40% of trades won, averaging 3R, and 60% lost, averaging 1R. These figures are invented for the exercise.

    7What is the expectancy per trade?
    Show the answer

    D: +0.6R. Expectancy is the win rate times the average win minus the loss rate times the average loss: 0.4 x 3 - 0.6 x 1 = 1.2 - 0.6 = +0.6R. At $300 a unit of R, that averages $180 a trade. A strategy can lose more often than it wins and still earn money.

Readers also ask

What does R mean in a trading journal?

R is the amount you planned to risk on a trade, the distance from entry to stop times the share count. Results are written as multiples of it: a trade that risked $300 and made $900 is +3R, and one stopped out as planned is -1R. Recording in R lets you compare trades of different sizes on one scale.

How many trades do you need before judging a strategy?

No number settles it, and the answer depends on how often the strategy wins and how large its wins are. A handful of trades can be swung heavily by luck. Keep the rules unchanged for a long run of trades, record each one in R, and treat any early conclusion as provisional.

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