Trading journal

Trading Journal

Overview

What is a Trading Journal?

Why do I need a Trading Journal?

Those are the 2 questions you will be asking.

A Trading Journal will be your companion through your very own trading journey. It will help you through the bad times, stop you being complacent in the good times and allow you to constantly improve and refine your strategy.

Here is a list of what I include in my Trading Journal (mine is in a spreadsheet format):

  1. My trading plan
  2. My trade setup(s)
    • you may need 1 for Long and Short
    • you may need 1 for different Asset Types
  3. A way of comparing multiple potential trades to identify the most favourable
  4. Where I list my trade tolerances
    • Minimum acceptable Risk/Reward ratio
    • Maximum % loss per trade
    • Maximum equity % to use as margin per trade
  5. A record of all trades (even the bad ones)
    • Market & Symbol
    • Direction
    • Date Opened/Closed
    • Average Open
    • # Positions
    • Total Position (£)
    • Margin (£)
    • Stop Loss
    • Take Profit
    • Close
    • Calculated data
      • Maximum Adverse Excursion (£)
      • Maximum Favourable Excursion (£)
      • Risk/Reward Ratio
      • Entry Efficiency
      • Maximum Drawdown
      • Maximum Run Up
      • Profit/Loss
      • Return
    • Notes
  6. Overall profit/loss records

I will now go into more detail for each of the 6 sections contained within my Trade Journal.

Trading Plan

This is the most important section of your Trading Journal and you should always start here. It will certainly be refined but needs to be your first and highest priority.

Your Trading Plan should include the following key elements:

  1. Your motivation for trading
    • Ask yourself why you want to become a trader and then write down what you want to achieve from trading. The reasons are endless; to stop working, to supplement your income, something to do in retirement.
  2. The time commitment you can/want to make
    • Determine how much time you can realistically commit to trading. Is it every day, only at weekends, only evenings? How many hours each day?
    • Also state what you would like to achieve in the future if it differs from now.
  3. Your trading goals
    • This section needs to include measurable goals (both performance and psychology related)
    • For example
      • Year 1: I want to break even, including all associated costs.
      • Years 2-3: I want to achieve +15% growth in my trading account every year, including all associated costs.
      • Years 4+: I want to achieve +20% growth in my trading account every year, including all associated costs.
  4. Your attitude to risk
    • How risk averse are you? A great piece of advice I read is, if you are staying awake thinking about a trade then you are risking too much.
    • All trading carries risk but what would be your worst case before you said enough? Losing 5%, 10%, 25%, 50%?
  5. Your available capital for trading
    • This is harder to answer than many think. It is not just about how much capital you have available but also where has it come from? Is it from savings or borrowed money? Maybe you are using other assets as collateral?
    • Your available capital ties in heavily with your attitude to risk. If you stay awake thinking about the capital (even when you are not in trades) then you are using too much.
  6. The markets you want to trade
    • Do you only want to trade stocks? Or other Asset Types like ETFs, Futures and Commodities?
    • Bare in mind that different Asset Types may have different trading hours and definitely different capital (margin) requirements.
  7. Your trading style
    • What is your trading style? (Position Trading/ Trend Follower; Swing Trader; Day Trader; Scalper)
    • Would you consider “going short”? (profiting from a fall in price)
    • How long would you be prepared to stay in a trade for?
  8. Your market knowledge
    • Be honest about the level of knowledge you have and where you may have gaps. Make sure those gaps are documented and included as tasks in your Trading Goals.
    • Use this site as a source of education to fill those gaps. Content shall be continuously added and renewed.

Trade Tolerances

Your Trading Journal must include trade tolerances because they are intrinsically linked to your attitude to risk. As mentioned earlier there are 3 key values to determine:

  1. Minimum acceptable Risk/Reward ratio
    • When you approach a new trade you should always know what the Risk to Reward ratio is.
    • If the maximum loss on a trade is £200 and the maximum reward is £300 then your Risk to Reward ratio is £300/£200, or 1.5.
    • You need to define the smallest ratio you would accept before entering a trade.
    • If you have a ratio of 1.0 then you need 50% winning trades to break even (before costs). If you have a ratio of 1.5 then you need 40% winning trades (before costs). If you have a ratio of 0.5 you need 67% winning trades (before costs).
    • As you can see your Risk to Reward ratio directly correlates with how many winners you need, which in turn is heavily influenced by your trading style.
  2. Maximum % loss per trade
    • This is the maximum % of your trading account that you are willing to lose on any 1 trade.
    • This should have been partially answered by your attitude to risk as defined in your Trading Plan.
    • If you opened 5 trades, each risking 20%, then were they all to lose, your account would be empty. If you opened 5 trades, each risking 5%, then your account would be down 25%.
    • We all have losing sequences, either because our system is not right or market conditions have been turbulent. If you set it low and lose you get to fight another day. If you set it high and lose you are out.
  3. Maximum equity % to use as margin per trade
    • This value will determine how many trades you can have open simultaneously.
    • If you set the maximum equity at 10% per trade then your account should be able to sustain 10 open positions.
    • This is highly correlated with your maximum loss per trade because you cannot accept a 20% loss per trade and have 10 open positions.
    • If you can support a higher number of open positions then you have the opportunity to diversify your trading, either across sectors, or a mix of Long and Short trades.

Trade Setups

Your trade setups are the equivalent of intellectual property in the world of business. They are how you filter the endless trade options down to a few candidates. The setup you use will depend on your trading style but here are a few:

  • Buy and Hold
  • Momentum
  • Elliot Wave
  • Fibonacci retracement and extension
  • Breakout
  • Mean Reversion
  • Moving Averages
  • Arbitrage
  • Pivot Points
  • Channels
  • Patterns
  • Carry Trade (Forex only)
  • Artificial Intelligence

As part of the Trading AtoZ setup I use a combination of Momentum, Fibonacci, Moving Averages and Artificial Intelligence.

Comparing Potential Trades

When you have performed your daily analysis and run through your various trade setups you are likely to have a shortlist of potential trades. This part of your Trading Journal will be dedicated to how you compare them and choose the ones that you want to take forward to active trades or orders.

There are a number of factors you must consider when comparing trades:

  • What is the minimum position size/contract/lot size?
  • What is the margin requirement?
  • What is your expected open price
  • What will your Stop Loss be
  • What will your Take Profit be

With these 5 pieces of information you can ensure the trade will meet your trade tolerances. You should discard any trades that do not.

You now have a few choices to decide between the remaining trades:

  • Choose trades with the highest potential Risk to Reward ratio
  • Select trades with the smallest Loss %
  • Choose trades that allow for diversification (across sectors, currencies, long/short)

Trade Records

This section will be where you document all your trades, whether they were successful or not. I listed all the data required in the first section of this page.

There are a few pieces of calculated data in the list that may not be common knowledge:

  • Maximum Adverse Excursion (points)
    • The Maximum Adverse Excursion (MAE) is the maximum amount the price goes against you whilst in a trade. This would be the lowest low during a long trade, or the highest high during a short trade.
  • Maximum Favourable Excursion (points)
    • The Maximum Favourable Excursion (MFE) is the maximum amount the price goes in your favour whilst in a trade. This would be the highest high during a long trade, or the lowest low during a short trade.
  • Entry Efficiency
    • This gives a quantifiable and measurable value for how good your system is at entering into a trade.
    • For short trades it is calculated as
      • (Open Price – MFE) / (MAE – MFE)
    • For long trades it is calculated as
      • (MFE – Open Price) / (MFE – MAE)
  • Maximum Drawdown (my version)
    • Maximum drawdown is the maximum observed loss from the open to the MAE of a trade. This is specified in £.
  • Maximum Run Up
    • Maximum run up is the maximum observed profit from the open to the MFE of a trade. This is specified in £.

I would like to thank David Stendahl for his work on Money Management from which many of these concepts are derived. One of his many books is available from the suggested reading section.

The values derived here will be of great use if you wish to create your own money management techniques.

Profit/Loss

This is the section of the Trading Journal we all love but is unfortunately the least important. You need to keep records but do not get obsessed with your absolute profit or annualised return. When you start trading the affect that any one trade has on your profitability is immense. Not until you have many trades, over at least 6 months, will you start to notice your performance settling down.

My profit and loss records are recorded on a monthly basis and show the following for each month:

  • Account size at start of month
  • Trades Opened, Closed and Active
  • Cost of trading
    • Account fees
    • Data
    • Commission
  • Deposits
  • Withdrawals
  • Profit/Loss from closed positions
  • Profit/Loss on open positions
  • Account size at end of month
    • Excluding and including open positions
  • A benchmark (like the S&P 500, FTSE 100)

Once you have all this data you can calculate your performance. I would advise reviewing this data monthly to determine whether you need to adjust your Trade Tolerances.

You may find that your cost of trading is high relative to your account size. This could mean you need a different broker, or to trade different markets. You may have had a losing sequence which caused your account to reduce in value more than you hoped. This implies your maximum loss % per trade is too high.

Unfortunately, there may be cases where you realise that even though your strategy and systems are working, your account is not sufficiently funded to be profitable. Be honest with yourself and work out how much additional capital you would need and define a plan to achieve that.

Summary

All 6 sections are important to your Trading Journal but if I had to put them in order of importance I would chose the following:

  1. Trading Plan
  2. Trade Tolerances
  3. Trade Setups
  4. Trade Records
  5. Comparing Potential Trades
  6. Profit/Loss

Once you have completed these 6 sections you will have an edge over the majority of traders.

I am planning to release my own Trading Journal through Trading AtoZ. The trading journal template will be in the form of a google sheet and come loaded with example data.

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