If you capture a record of all your trading activities faithfully and with complete honesty it will become THE most valuable trading tool you have in your possession.
Here’s why: It will let you clearly see your strengths and weaknesses at a glance.
Once you’ve built up a reasonable bank of trading data you can start delving deep. And when you do you’ll probably uncover some surprising finds.
You’ll see exactly the areas in which you are strong…and you’ll also find your weak spot – your trader’s ‘Achilles heel’. These are the trades or market conditions that just don’t seem to sit with you very well for whatever reason. And don’t worry, we all have them!
So exactly what do you do with all this fascinating information once you’ve revealed it?
Simple: you start looking for ways to maximise the trades that fall into your suite of strengths and you look to cut-out as many trades as possible that lurk in your weak spots.
Just doing that one simple exercise can quickly turn a losing account into a profit machine.
How to keep records that’ll help improve your performance
Now to start with, I think there are 2 parts to keeping good trading records: there’s the Trading Journal and the Record of Results.
They might sound like the same thing so let me explain how they differ and how they can each be used to your advantage.
1) The Trading Journal: This is your trading ‘day book’. It lets you record all the crucial information from your trades: entry price, exit price, reason for taking the trade etc… all that stuff goes in here.
(Yes, you’ll have an obvious set of information to note against each trade but I’m going to tell you why you should consider some of the more unusual items in a minute.)
The Trading Journal is also where you can record any emotions you are experiencing at the time and where you can scribble down any new flashes of inspiration you might have. You can even sketch out any unusual chart patterns that you spot.
So the key here is that the Journal needs to be a document that’s quick and easy to access. It’s no use having a complicated spreadsheet that you need to fill in at this stage. Chances are it’ll actually become an obstacle to you recording accurate entries.
So do you know what I think works best? Good old pen and paper.
You can use loose leaf paper each day and then file them all away in a ring binder, or you can get yourself a fancy hardback notebook. It doesn’t matter as long as long as whatever you use is close at hand, ready for you to grab and get scribbling away as soon as you need it.
So think of the Trading Journal as being creative and organic. Record the essentials, but also brain-dump any other thoughts you have in your Journal. Capture it all on paper – you never know which ideas might create your next big break through!
Then, at the end of the day, or at a convenient time during your trading session, you can transfer the relevant raw data from your journal into your Record of Results.
Here’s how the Record of Results differs from the Trading Journal:
2) Record of Results: This is the hard data that you extract from your Trading Journal. The journal allowed you to capture a flow of information and ideas in the heat of the moment and now it’s time to pick out the useful bits. You need to record them in a way that lets you analyse them and spot those potentially profitable tweaks.
Think clinical and scientific for your Record of Results. I think a computer spreadsheet is the order of the day here. You can keep your Record of Results on paper but a spreadsheet will give you so much flexibility when it comes to actually working with the data (try the free to download Openoffice if you don’t already have Microsoft Excel).
So what to record?
Well, you’ll need all the basic trade info that we mentioned before: the entry price, the exit price, the stop loss price you were using, the reason for taking the trade, the profit/loss achieved etc…
That’ll tell you where you stand in terms of profitability at any given moment (and it’ll also let you reconcile your broker’s statement to make sure there have been no oversights or errors).
But to start making incremental improvement s to your performance you can also record an expanded set of metrics.
And the more data you capture, the easier it’ll be to find patterns that help you improve your results.
Here are some additional data point ideas you could start working with:
- a) Day of the week:Keep a tally of winning trades Vs Losing trades (or even pips won/lost) on the different days of the week. I once traded an S&P futures strategy that was long-term profitable, but only if you didn’t use it on Tuesdays!
- b) Maximum Adverse Excursion (MAE):This is a fancy way of saying: what was the best stop loss size I could have used on each opportunity in order to make the most money? Your records might tell you that you have a tendency to place your stops too wide (costing unnecessary pips) or even too tight (stopping you out of good trades too early).
- c) Maximum Favourable Excursion (MFE): This one asks you to record what was on the table in terms of maximum number of pips on each trade. You might find that you’re currently cutting your potential profits short, or that you are over-reaching and not taking profits soon enough.
- d) Percentage of MFE Captured: This is another way of measuring your performance against the potential profits that are available on each trade. If you find you are only capturing 20 – 30% of the overall profits available on a regular basisit’s telling you that you have no problem in finding good opportunities – but you simply need to let them run! Making this tweak will be like picking money up off the floor for you.
- e) Trade Duration: How long do your trades last? Do you find that the majority of your losing trades are the ones that last longer than 30 minutes and that the bulk of your pips are actually secured within half an hour on the winning trades? You could introduce a simple ‘time stop’ on the 30 minute mark – you’d close any open trades at that point and stem the wasteful losses.
- f) Trading session: Where are the bulk of your Forex profits coming from – the London session? Are you wasting too much time trading unprofitable periods later in the afternoon when the US comes online? You might even uncover a single ‘golden hour’ of the day that lets you trim down your time at the screen yet still retain the lion’s share of your monthly winnings.
- g) Frame of Mind:How were you feeling at the time you placed the trade, were you anxious and angry or relaxed and confident? You might find some surprising insights here. You might even find you do your very best trading when feeling a little bit nervy rather than full of confidence and bravado!
So be creative and go beyond recording the bare minimum price data of your trades. It’ll be worth your while, I promise.
And what other unusual metrics can you think of that might help you tweak and maximise your own performance?
I know traders who keep track of the current phase of the Moon and they will not trade at certain times of the month.
Is that really giving them an edge in performance? I couldn’t say. But their Record of Results would soon tell you!
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 12th April
09:30 GBP Average Earnings Index
09:30 GBP BoE Carney Speaks
09:30 GBP Claimant Count Change
Thursday 13th April
13:30 USD Producer Price Index
Friday 14th April
– Good Friday Holiday
13:30 USD Consumer Price Index
13:30 USD Retail Sales
Monday 17th April
– Easter Monday Holiday
Tuesday 18th April
13:30 USD Building Permits
It’s quite a quiet week ahead in terms of reports. Also, watch out for thin markets as we wind-down into the Easter Holiday weekend. Have a lovely Easter break and I’ll catch up with you again next week.