Commander in Pips: In the previous lesson we’ve set up a general framework for performance tracking. Let’s make some more clarifications in this part.
Pipruit: Yes, the previous part was very informative. I’ve learned a lot of new things. Previously I thought that all these paper routines were needless, but know I have a feeling that it is 50% of success.
Commander in Pips: I’m glad that this was useful for you and you’re right. So let’s continue a bit further, although the most important things we’ve already specified.
Charts saving and pre-analysis
Keeping charts in your journal is a very good idea, since after some time you can misunderstand something with just writings. Looking at a particular chart will help you clearly understand the reasons for your trade. Depending on your trading system you may save as many charts as you need, but often there should be one chart before the trade was triggered and another one when profit/loss has been hit. Since you make trades based on your trading system and a predefined trading plan – usually you wait until reaching of some area, appearing some pattern or some indicator’s signal. Any system is based on the assumption that using these events will give you a risk/reward ratio greater than 1 and significantly increase the probability of price moving in your favor. That’s why the first chart will contain price action right near your triggering point.
Later, you can accumulate experience, since you will trade the same patterns or signals again and again. Some will fail but some will lead to success. Based on price action after some time you will be able understand traps, failure moves, take into account all nuances and make more precise analysis based on this. Your experience will start to work for you.
Second, to find such zone where you intend to act you need higher time frame analysis. Very often this zone could appear as overbought/oversold of a higher time frame, Classical or Fibonacci support/resistance areas, Fib extensions targets, higher time frame patterns and other stuff or their combination. The current time frame also will add something to the overall picture. Since higher time frame analysis will not change fast and you may use it in multiple trades – it will be better to save it also. Besides, higher time frame analysis will not be seen in the details on your chart where the major battlefield will stand – it will show you just an area.
Every trade demands specification how you are going to enter and what technique to use. For that purpose we need a lower time frame chart (remember that we have talked about regarding multiple time frames analysis). It is very unwise to jump in blindly – better to wait for when the market will confirm your potential entry area. Depending on your trading style you may use a lot of different things – candlestick patterns, Gartley harmonic patterns, classical patterns, divergences, oscillators or something. Use what is working personally for you. The major idea is to confirm your entry area. Entry technique also could include some worrisome signs that cancel a potential trade. For example, a long thrusting bar near harmonic pattern completion point, erasing or harmonic pattern, trend breaking or something.
Just remember – your entry zone and your entry technique are solid, indivisible. Blindly jump in at a predefined area leads to solid stress and loss, since you can’t resolve where to place your stop, while applying entry technique in occasional areas without preliminary analysis and context leads to catastrophe. Potential entry area just shows where to search for a signal, while entry technique lets you either find this signal or shows you that this area has failed and is not suitable for entering anymore.
Lot size and risk threshold
Actually this has to be specified in your trading system, but your journal will help you to assess how comfortable you stand with specific lot sizes and risk limits. For instance, you’ve established your risk limit as 1.5% of total assets in any trade. Since you trade on the daily time frame – your lot size is 0.01-0.05, depending on stop placement. If you feel very uncomfortable with small cash profit and have no satisfaction from your hard work – this could let you shift to an time frame, or add cash to your account if your system is profitable.
Otherwise, if your account 10 million USD and 1.5% risk looks small in terms of percent, but your journal tells you that you are psychologically uncomfortable with potential losses of 150 K USD in each trade – you may reduce trading lot size, or withdraw some part of your assets to feel more comfortable and relieve that mental pressure.
Also if you have some limitations on loss trades in a row, especially within some period, your journal will show you that this is a time to take a break.
Managing opened position
This is also part of preliminary work that must be done prior entering the trade. When a trade is underway you will not have a lot of time to describe what you’re feeling and what you’re doing, especially if you’re a scalp trader. You will be able to make just few notes in process. So, this management plan should have three major points – where you will place your initial stop, your initial profit target and how will you manage position/stop loss order.
For instance, you may suggest such plan as we’ve described with harmonic patterns:
“Enter with two lots (0.75% total assets risk each) with initial stop 40 pips below 1.618 butterfly completing point. Exit first lot at 0.382 retracement target, stop moved to breakeven. Exit second lot at 0.618 retracement target.”
So, you know all scenarios and how you will act with each of them. You will not get stuck on a question if the market will run against you “What do I have to do now? My money! Please somebody, help me!”
Speaking about trading, you have to foresee and prepare in any potential trade as much as you can, work through any scenario and make a trading plan for every possible case.
Review your journal
This is a good habit review and analyze past trades that are fixed in your journal. We hope that they fixed with corresponding charts. If you make 1-2 trades during 1-2 days then you can pass through your journal during weekend. If you trade oftener you can do it in the evening 2-3 times per week, when your trading session is over. Since tomorrow new trades are expected you – mistakes should be eliminated just to not been transferred in new trades. This could be done by analyzing of your past trades – how it was planned, how it was realized and what was done well or bad when it was in progress.
Here are most typical questions that you have to answer when looking at past trades:
- Did you accomplish your trading plan at 100% - enter when you’ve planned, exit how you’ve planned and with the lot size that you’ve intend to?
- Did you feel some mental pressure because of too large of trading lot size or some lack of interest to trade due too small of lot size? Can you change something to balance lot size and your risk management to feel yourself more comfortable mentally?
- Was there any possibility to enter at a better level and can you tell that you’ve missed some pattern that pointed to that or you can’t foresee it anyway – this was just unpredictable move by market?
- What event has triggered the move in your favor (or against you) – technical issue, some data or news release, statement or something else?
- How has the market reacted on your profit taking and stop-loss areas? Was take profit placed too tight or too far, how market has behaved around it – respected it or just run through it?
- The same is for stop-loss area. Has the market just fallen through it like a stone, respected it or even turned in your favor? How efficient was the placement of your stop-loss order.
Pipruit: And what we can do to reduce the probability of such losses?
Commander in Pips: I think so, because if the market reverses in your stop-loss order area, then it tells that this area is not suitable for that. Here is a simple rule – place stop-loss at the level, so that if market will reach it, this means that the market 100% proceed against you. This level is the crash area of your context for trading.
The opposite is true for your take profit order. If market has passed through it without any respect, it means that your order was placed too close. Still this is not always so – this should be watched within overall context. If you’ve planned this ahead of time and your risk/reward ratio is acceptable then there is no mistake with a closer profit target.
Then you have to understand how you’ve behaved when trade was in progress:
- Again – have you accomplished your trading plan at 100%?
- Did you move your stop-loss to protect your profit as you’ve planned initially or allowed yourself some voluntary changes by gut feeling?
- Did you take partial profit or scale your position without this being a planned of this procedure?
- Did you do anything by your emotions (everything that was not in your trading plan)?
- Did you take profit as planned or there was some emergency situation?
And finally you have to make a conclusion based on this analysis. Definitely you will come to see “I need to be more disciplined” or “I need take more profit and smaller loss” and so on, but such answers do not improve your trading skills. I can ask you a simple question – “How?” So, the same as with goals as with analysis of past results, we have to be specific. You have to answer definitely – how do you intend to be more disciplined, or how do you intend to adjust your profit taking technique. For example you may say – “if a higher time frame MACD supports my trade – I will take at least a 1.0 Fib extension target, if not – I will take 0.618”. That is a specific answer. The same must be done with other aspects of your trading plan or technique that is in demand of improvement.
Anyway most important question that you have to answer is – “Do you ALWAYS follow your trading plan or not?” It’s better to have bad trading system than to have a lack of discipline, because change of trading tools is much simpler than to gain discipline.
Pipruit: Ok, I think I’ve got it. Keeping the journal and analyzing it is necessary to understand what is good and continue to do it and what is bad and stop doing it, right?
1. By particular pattern/context or pattern/context + market (or pair);
2. Market style – trending/ranging + pattern/context;
Then you can add more details in each group:
- entry technique;
- lot size, stop-loss placement, target levels;
- application of scaling of position, partial profit taking;
- lot size, stop-loss placement, target levels;
- application of scaling of position, partial profit taking;
Then you can analyze it from a different perspective:
3. Particular trading time – week days and time during the day. When your trades are successful and when they are not.
4. How long you can trade without breaks;
5. How long do you have to rest – during the day, between trading periods;
6. Discipline issues.
Then you can combine these different ways of analysis. So, you may come to the conclusion:
"Each first week of the each month(except August) it is better to trade butterfly 1.618 on hourly charts of USD/CHF during the overlapping of Europe and US trading sessions. 90% probability profit objective is 0.5 retracement of butterfly, 90% maximum drawdown below 1.618 level is 45 pips"
Ok, this maybe looks too detailed and is a bit unrealistic, but your conclusions will not be too different from it. Initially you will have just few points of ranging your performance, but later as your experience will start to grow – more and more specific points for analysis will appear. But do not make it too sophisticated, otherwise you will not have time to trade…
Pipruit: Oh, Sir, I understand that this is very important to keep a journal and review it from time to time, but I just foresee how it will be boring.
Besides, a trading journal is not a girl’s diary of occasional setups for trading – the journal is structured and it lets you to assess every context that you use in trading. The same as with an athlete coach who could return to the past with logs and refresh how he has improved some athlete’s characteristics – goal shooting, for instance, or endurance.