Assess Your 2004 and Improve Your 2005

Now is a great time to review your 2004 performance. This is an urgent task for all traders because the assessment will uncover weaknesses that could resurface and undermine profitability next year. So it makes sense to take corrective measures now and start 2005 with a clean slate.

How traders earn profits over the course of the year is just as important as the profits themselves. And bottom-line trading income isn't the sole factor in judging overall performance. In fact, the profit-and-loss statement can be quite deceiving. Here's why.

Many market players are yo-yo traders who make money when stocks are going up and lose it when they're going down. They tend to prosper in bull markets and get crushed in bear markets. It's where the expression "bull market genius" finds its origins.

On the other hand, experienced traders prosper in various market conditions, experiencing shallow drawdowns during tough periods and steep profits during favorable periods. These successful players show a consistent equity curve because they adapt their strategies to changing markets.

Look carefully at your month-to-month profitability in 2004. This exercise will reveal a lot about your trading style, perhaps even more than you want to know. Then realize it's a major warning sign if you lost money until mid-August, then magically turned things around with a great run into December.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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