- How to take advantage of a trading log.
- Why it is important to use a trading log and how it apply it correctly.
- Which elements a trading log should entail and how this at a later point in time can be analyzed and improve your trading.
- Currency pair
- Entry price
- Number of lots opened
- Initial Protective Stop level
- Reason for entering into the trade
- Target price (if any)
- Exit price
- Reason for exiting out of the trade
- Result (pips, $ and percentage)
A more detailed description of some of these items is provided later in this chapter.
After a suitable sized number of journal entries have been recorded, you then have the opportunity to analyze the data to detect certain trends. You could do this by asking questions such as:
- After entry, did the market proceed as anticipated?
- What was my largest reversal?
- If a loss was recorded, was there a prior opportunity to take profit?
- Did I succumb to moving my stop during the trade?
- Did I trade in the same direction as the daily trend?
- Did I let profits run and maximize my gain?
- Could I have improved my entry and exit conditions?
- Did any serious fundamental data releases affect my trade?
- Could I have managed the trade better?
- Did I overtrade?
Are there any real benefits that can be achieved by maintaining a trading log you may ask? Yes, there are! In fact, I would go as far to say that without creating one, your chances of trading the forex market successfully are greatly reduced.
The first important benefit of carefully maintaining a log is that it will assist you in understanding the impact of The Pareto Principle or the 80/20 rule on your forex trading. This rule implies that in many human activities only 20% of the actions involved are vital whilst the remaining 80% are trivial. Such examples are: 20% of your stock takes up 80% of your warehouse, 20% of your sales staff generate 80% of your sales whilst only 20% of your workforce generates 80% of your production.
In a similar way and by applying Pareto's rule, you should now grasp the concept that 80% of your profit comes from your actions associated with only 20% of your trades. This is great to know but how do you determine which of the 20% of your trades are the vital ones? This is where recording a trading log comes into its own. By recording all the information in your journal carefully, you have the opportunity of later studying your actions in detail.
From your analysis, you should be able to classify which of your trades are profitable and which are not. In addition, you may well be able to locate key trends or patterns such as 'were you closing trades on Tuesday with profit' or 'were all the trades you closed on Monday losses?' In order to identify the vital 20%, you must develop a strong understanding of the statistics of your actions and their consequent results. For instance, do you enter trades every time a vital item of fundamental data is released? If so, is this strategy profitable in the long term, or is it just a waste of your time and money?
You must use Pareto's rule to stop deluding yourself that your trading system is probably successful. You need to analyze the key components to prove this fact and then make it more efficient by identifying the key 20% of your actions. Even if you already are trading profitable, there is no reason not to identify the best and worst trades, and decrease the amount of less profitable trades and increase the more profitable ones. The more trades you take, the more you expose yourself to increased risk.
The questions stated above, which you should be able to answer in the process of developing your trading log, is only a small piece of what such study should enable you to answer. There are many other questions which you can ask, to help yourself becoming a better trader:
Are all your losing trades been in the direction of the trend? Which session did you trade? What was your emotional state at the time the trade was entered - tired, drunk, sad, happy, etc.? Were you experiencing a streak of losing or winning trades prior to entering a new trade?
Think of everything which can affect the way you trade, and put it down on paper. Afterward, analyze these aspects and determine which ones you think are the most important. This is necessary, as too many details might result in the opposite of what we want; too much information is no information.
Your trading log will help you by providing the basis from which you can undertake this study. I am not only talking about only removing loosing trades, but also trades with a bad risk to reward ratio for instance. The 80-20 rule turned out to be rather accurate regarding my own trading systems. Changing this was one aspect which made me improve my results and also reduce the time I spend on trading.
There is another extremely important reason why you should log all your trades. You need this information to calculate whether your forex trading system is actually making you profits. This task is normally done by calculating the expectancy value (EV) of your forex trading system.
Once done, the EV will then tell you the average amount you can expect to profit over the long haul, for every $1 risked. Negative EV's produce long term losses whilst positive ones generate long term profits. How do you calculate the EV of your trading system? This is done using the following formula:
EV= (%Win X Avg_Win) - (%Loss X Avg_Loss)
% Win = percentage of trades that are winners
% Loss = percentage of trades that are losers
Avg_Win = average size of a win
Avg_Loss = average size of a loss
The EV of a trading system is a statistical measure that becomes more accurate as the number of trades included in the calculation increases. This value should be calculated from a statistical batch of about 100 trades to be accurate although a pattern typically begins to emerge after about 30 recorded trades.
EV is a measure of what you can expect to profit for every $1 risked over the long run. This "over the long run" part is important because it means that you cannot have any meaningful evaluation of a trading system with just a small batch of trades. Instead, enough trades must be included in the calculation so that irregular effects are averaged out.
Another important benefit which will be obtained from using a trade log is that it often helps to minimize overtrading. From my own experience and information I got from fellow traders, overtrading can be a difficult task to control. The simple reason why a trade log will reduce this aspect is because it takes time to write down all the details. If you follow your own rules about the log, you will need to consider several different dimensions of the trade before you enter it, and hence it’s not possible to take trades based on intuition. Furthermore, when you have to write down all the details, you will often realize that the trade you are planning to take cannot be justified by any solid arguments, and obviously, the trade should be reconsidered.
You should now begin to understand the merits of maintaining a trading log. Some of the entries that you should consider recording are listed above. Think of other things which you believe might have an impact on your trading, and add those as well.
The first time you start a forex trading log, it might be difficult to realize what is important and what is insignificant. This is a trial and error process, which will take time. Add different information to your log so you can analyze if your trading improves or not. In case nothing happens, you might want to reconsider the specific information entailed in your log and change to items with other aspects. Besides from what you might think of as important, the following dimensions should always have its place in your log:
- 1. Date and time of each trade entered. When you wish to examine the details of a particular trade or to do analysis of a batch of trades, this information will allow you to locate and access the charts for that trade more easily.
- 2. Emotional condition. Oddly enough, this may well be the most important item to record. Many traders have discovered that, if they log their psychological state of mind at the time of each new trade entry, then this action helps them to identify good and bad trading patterns in their behavior at a later date.
- 3. The exact entry criteria that the market price is required to satisfy for each trade. Ideally, this should compare exactly to the one used in your trading strategy and, as such, should provide you with a reminder not to enter a trade unless you have a perfect match. You will also have records after a period of time that will allow you to analyze whether, for example, a losing trade could have been avoided.
- 4. The entry and exit prices and size lot of each trade entered. This information can be used to determine if you overtraded or if you adhered to your money management strategy. In addition, you will be able to calculate the win:loss ratio of your trading strategy.
As mentioned above, add your own elements, and get started now. Find a free example log online, or else create your own excel sheet and start tracking all the details necessary in order to analyze it continuously.