by Justin P.
In this article we're going to explore a subject that everyone talks about but very few explain in detail: record keeping. Unfortunately it's one of the boring aspects of trading, but just as good businesses do their book keeping, good traders that treat this as a business should have flawless records.
1. The Importance of a Trading Journal
In previous articles we have touched on the importance of maintaining good records. But why exactly is it so important to have good records in the first place?
Keeping good records acts like an attentive coach, quickly spotting where your problems are. For example, at a certain point of my career, I had a tremendous win:loss ratio but I still managed to lose money. My trading journal told me what I was doing wrong: cutting winners at their knees. The journal also informed me of what I was doing right—cutting losses equally fast—but when looking at the whole picture, my average win was only half that of my average loss. Thanks to keeping a solid trading journal, I had the necessary information to incorporate into my future trading habits to turn things around.
Honestly, the thought of staying oblivious to giant flaws in your trading approach should keep you up at night! You can’t take yourself serious as a trader if you don’t take the time to analyze where your weaknesses are so that you can fix them. Let’s take a look at common problems and where the trading journal comes in to save the day.
A) Am I cutting my winners short?
Start by thinking of your plan. Where was your target? Where did you exit the trade? If you're jumping ship too soon, go and look back at what would have happened if you held to your original convictions. If you are screwing things up by actively managing your trades, you have a head start on fixing your issue the next time you step up to bat. Use this tool to straighten your mindset. You might recall a few trades where you got out early because you were scared, but do you really expect to be able to remember the exact details of your emotions and thoughts for every single trade you’ve made? Of course not. That’d be unrealistic.
Using a trading journal allows you to keep track and look at what really goes on across all of your trades. Did you exit early because you were nervous that day because of big data coming out? Did you close out because you were irritated about events in your personal life? Did you make a logical, emotionless decision to cut it early for good reasons? These seemingly unimportant details will ultimately be some of the most critical factors to analyze in your trading.
In some cases, keeping records may help you even if your own discipline isn’t a regular issue. It can offer you insight on ways you can tweak your performance. Are you giving up a good portion of Maximum Favorable Excursion (MFE)? Get back to the drawing board and find a way to incorporate this into your trade management plan. Would you have been better off using a trailing stop? Did you forget to factor in the bigger-picture view? Could you have entered at a better point?
Another issue you can solve is your Maximum Adverse Excursion (MAE). How far do your winning trades go into the red before they go into the black? If you trade from the same angle for any length of time, you'll notice a pattern. Your trading journal will capture that pattern for you and will be able to say whether your average is 20 pips, 10 pips, or even 50 pips on the larger moves or more volatile pairs. Upgrading the efficiency of your entries will allow you to minimize intratrade drawdowns and maximize your returns. The less the trade goes offside before trotting along to target, the more efficient an entry system you have.
This isn’t easy to do. It takes time, dedication, and a lot of effort. But if you’re serious about making it in this business, you need to invest the mental and emotional capital into a trading journal.
B) How can I lose less?
Is there a common denominator linking together your losers? By looking at a given trading journal sample, you can look for any recurring factor that pops up in your losses. Are you trying to squeeze too much juice out of the trade? Are you falling into the trap of trying to pick market turns? Are ignoring clear signs it’s time to scratch the trade? Are you too quick to scratch a trade even when there is no clear sign to do so? Are there certain days of the week (like Mondays and Fridays) that seem to produce constant losers? Or are you simply not following your own rules? With the help of your trading journal, you can now see the root of your problems and fix it.
C) How can I just do better overall?
Do you miss many trades? Do you find difficulty finding an efficient entry? Do you find yourself waiting for “the right moment” only to wait too long? Are you getting nervous because you really don't understand what you're doing in the first place? You might not catch on to these obvious stumbling blocks when you’re in the moment day-to-day, but guess what? Your trading journal will.
D) Do I even have an edge?
The topic of an edge is beyond the scope of this article and we’ve covered it previously on the site. If you’re unfamiliar with the term, it simply means “your inherent advantage to achieve profits over time”. Keeping track of your trades lets you pick apart your past trades individually to see the strengths as weaknesses, as well as look at the big picture performance of your strategy as a whole. Both of these will determine whether your edge is viable or not. If it isn’t, you’ll have a large trading journal sample size to look at what needs to be changed to achieve that edge.
2. Trading Journal Template (Excel or OpenOffice)
No two journals will look alike. I still manually put things into my spreadsheet and have rudimental formulas. You may prefer to jot them down in a notebook or maybe you prefer to keep a blog so others can see and keep you accountable. By no means does your trading journal have to perfectly mirror my setup, but let me break down what I look at and why. Take that content away and incorporate it into your own trading journal. If you do plan to track your trades with OpenOffice or Microsoft Excel, you can pick up some tips for structuring formulas in your own trading journal template.
So above there's a copy of my trading journal template with hypothetical trades and account balance inserted. Let's analyze what I put on this spreadsheet. It’s self-explanatory until we get to the P/L per pip column, so let me explain.
If “Sell” is written, calculate Entry – Exit ; otherwise, calculate Exit – Entry.
Then there's the %R. I calculate this as follows:
IF there has been a p/l in Euros THEN: if it's a Buy, do (Exit-Entry)/(Entry-Stop); if it's a sell, do (Entry-Exit)/(Stop-Entry).
Next up is the update of your Equity:
IF there has been a P/L in Euros THEN add it to the starting equity (hidden in white to keep the spreadsheet clean). On the subsequent entries, it will simply be adding the p/l to the equity on the row above. Now we have inserted all the hard data, so it's time to start doing some statistics on them.
Cumulative %Win/Loss: the first row will not be a formula. It will simply be 100% if your first entry is a win or 0% if it's been a loss. Then all the subsequent entries will be
IF there has been a current row pip P/L, THEN (Count the equity rows from the first entry until the current entry that are positive)/Current Trade Number (which is the first column on the left).
As for the next entries:
They are manually inserted. Market Risk is the amount of time spent in the markets. I used this to try and prove the fact that if a trade works out well, it will from the start. And if the trade is going to stop me out, it will do so quite quickly. If I have to scratch the trade, it will go nowhere for extended period of time.
Maximum Adverse Excursion: As mentioned earlier, this is how far the trade went offside before going your way. If your entries are efficient, this value should be relatively low.
Maximum Favorable Excursion: Also noted before, this is how far the trade went positive before you closed it. This is a measure of your trade management: if you give back too much of the profit, that’s a message to analyze your approach and look to tweak performance.
I also have 2 more columns after MFE that my screenshots don't show:
Setup Used: So you can evaluate the single effectiveness of each of your entry criteria.
Comments: So you can comment on the trade, on the market conditions, and perhaps most importantly: what kind of emotions you felt and why.
So now let's analyze the data written in blue at the top of the blotter:
N° Trades: Count all the values in the p/l pip column.
%Win: (Count all the positive values in the p/l pip column)/N° Trades
%Loss: (Count all the negative values in the p/l pip column)/n° trades
Risk per Trade: how much you are going to risk on each trade. I like to keep this value constant as a % of my equity. In the example, it's 0.1% of whatever the current total equity is. Knowing off the bat how much money I'm risking allows me to calculate the position size, based on the number of pips between my entry and my stop loss.
Longest Winning Streak: Manually inserted, count the longest streak of winning trades not interrupted by a loss.
Longest Losing Streak: This can be used to measure of your potential maximum drawdown when you combine your risk per trade + your longest streak (e.g., if you risk 0.50% of your account balance per trade and your longest streak has been 9 losses in a row, your potential maximum drawdown as it stands is about 4.50% of your account balance).
Position Size: (Money Risked/(n° pips to stop loss* money value of 1 pip when trading 1 lot))*1 lot
Example: (10 Euros/(10 pips*7 Euros))*100k = 13655 = 14 micro lots (rounded off to the closest thousand)
Avg. Win: (Sum the values in the %R column if they are positive)/(Count the values in %R column if they are positive).
Avg. Loss: (Sum the values in the %R column if they are negative)/(Count the values in the %R column if they are negative)
Return Quality (Volatility) = Standard deviation of the values in the %R column.
Expectancy = (%Win * Avg. Win) -absolute value of (%Loss*Avg. Loss), which should be above 0.5
Expectation (or Opportunity) = Expectancy * n° trades/day = avg. Daily expected win/loss in terms of %R
System quality = Expectation/ Return Quality, which should be above 0.5
So there you have it! Get out there and build your very own trading journal template and track your progress. Do not underestimate the benefits of doing all this work. Not only does this help you review and refine your performance, but if you want to pitch an offer at a prop firm or hedge fund, you'll be way ahead of the competition.