journal-with-candle

It’s not enough just to keep a trading journal. We need to actually use the information we collect to improve our trading. It’s easier to quantify aspects of our trading so that we can see how to make improvements and if we are indeed improving.

Here are a few tips on how to power up your trading journal so that you will have more control and take your trading to the next level.

 

Statistics like win rate, profits, maximum drawdowns etc. are all necessary as well. But they don’t give much information about exactly how we can improve our trading.

So we will focus on a few factors which can reveal more about your trading and can tell you how to improve your P&L.

 

Statistics of YOUR trading

MAE MFE example

1) MAE

(I’m going to describe MAE in more detail because you can use the same ideas for MFE in the next tip, just flipped around with reference to your profitable exits.)

MAE is the acronym for Maximum Adverse Excursion.

This simply means the maximum distance that price goes against your trade entry during the lifetime of your trade..

Having this data allows you to see if your stoplosses are too loose, meaning are you placing your stoploss levels further than you actually need to.

Track an average of your MAE for your trades and compare this with your average initial stoploss by taking a ratio. Divide your average MAE by your average initial stoploss, this gives you a ratio.

Personally as a rule of thumb, if I find this ratio is less than 0.4, it signals that my stoploss levels are too loose. I find a comfortable range for this number is around 0.5. But honestly you should do an advanced study of this to be more precise, which I will briefly describe below. But for now let me just give you the rough idea of how it works into improving your trading.

This data is most helpful to 2 types of traders

  1. Those who use fixed stoploss distances.

These traders can tighten or loosen their fixed stoplosses depending on the market. I just adjusted my stophunt strategy’s stoploss distance because I track this statistic and noticed I was placing my stoploss too far away for the current volatility of the market.

  1. Those who size their positions according to their stoploss distances.

By having a tighter stoploss, you will be able to size your trades larger while keeping to your risk management and maximising your winners.

 

You can go a step further and use data bins instead of averages.
For instance, I can classify the data bins as 0-10 bids, 11-20 bids, 21-30 bids and 31-40 bids.

Then I record how many instances where my MAE is between 0 – 10 bids and record the number. I do the same for each bin, recording how many instances the MAE falls into each of the bin’s range. This gives you a much clearer idea of where your MAEs are and how you can tighten your stoploss to maximize your edge. This is more precise than just using averages to make your adjustments.

 

Then of course you can go yet another step further with a 3D scatter diagram of your trade’s stoploss, MAE and trade result. Then you’ll be able to see things like for example, for all the trades that go beyond a certain point against you, their total net returns could be negative. Then maybe you want to cut off those trades which run that far against you.

 

Another example for the use of MAE, if you are taking a stophunt/false breakout entry, your stoploss will typically be very tight, because stop hunts or false breaks tend to reverse in your direction very quickly. If it doesn’t then you’re probably on the wrong side of the market. Hence, the data should corroborate that this strategy can keep a tight stoploss.

 

On the other hand, if you notice your stoploss is too tight, with a dip in your hitrates. Tracking the MAE a few hours (or days if you’re a swing trader) after you have been stopped out of your trade, can help to identify a more ideal stoploss distance for your strategy.

 

Having a suitable stoploss will help you control your losses and maximize your winners.

 

2) MFE

MFE is the acronym for Maximum Favourable Excursion. This means how far price goes in your favour from entry during the lifetime of the trade.

While MAE focused on your stoploss, MFE now focuses on the other exit of your trade, the profits.

This statistic will tell you how much money you’re leaving on the table.

Along with this statistic, there is also BSO, which means Best Scale Out price. Sometimes we do not exit a position in full, we may scale out of the trade as it moves in our favour at various milestones.

 

The information which MFE collects, is most useful to traders who use discretionary exits instead of waiting for either their stoploss, take profit or time stop to be hit. MFE gives you the ability to quantify how well you read the market and make trading decisions to exit trades.

 

So regardless of whether you are a day trader or swing trader, likely this information will be useful for you to maximise your profits.

 

Additionally, also check what happens to your trade after you’ve exited. A few hours if you’re a day trader, a few days if you’re a swing trader.

 

One of the legendary short term traders, Linda Raschke, believes that it’s psychologically easier to exit a trade too early than to exit a trade after it turns.

BALANCE-SCALe

3) Comments

Comment on the trade, why you got in, how you managed it, why you got out. How you felt before the trade, during the trade and after the trade.

Talk about the fundamental or technical setup, don’t need to elaborate on your broad analysis, but do talk about the nuances of the technical setup and trading environment at that point of time. Describe things you observe which affected your trading decisions in managing the trade. For example, what made you collapse a trade early. Or what made you tighten your stops. Also briefly describe how you felt at each point.

 

Throughout the lifecycle of a trade, our emotions will swing between being afraid to lose money, and being afraid of missing out. Rather than ignore these emotions, recognise them and how they might affect your bias when making trading decisions. This self-awareness will help you make avoid impulsive emotional decisions and make better trading decisions.

 

There is a great book about this psychological battle, titled “Market Mind Games” by Denise Shull. She goes goes into the details of this balance in a very well written and very easy reading book. If you are at the stage of trader development where you want to understand and manage your psychology better, this is the first book you need to read.

 

How to track improvements in your performance.

Besides observing the actual MAE and MFE numbers, we want to consider the impact on our profitability.

 

4) R multiple

By now I think most people have heard of the R-multiples calculation which Van Tharp popularized in his book “Trade your way to financial freedom”.

This ratio on it’s own, simply tells us how much profit, or loss, we made with respect to the amount of risk we took on that trade.

We could also do an average of all the R-multiples of our trades.
This can be calculated by taking our average profit divided by our average loss.

By making tweaks to improve our trading, we should see our R-multiples improve.

We can also look at the average loss and average profit numbers, to see exactly how our tweaks affected those aspects of our trading.

 

Using MAE and MFE will streamline your trading and the results will be evident in your R multiples.

 

2 more additional tips to improve your journaling efforts

 

5) Breakdown the statistics

Breakdown statistics for each type of trade setup you take, it will help you focus on the nuances of each strategy and improve your profitability.

In excel, simple add more columns to track the setup that the trade was based upon, the market trend or environment, which market was the trade taken on.

Have a separate sheet that breaks down the statistics based on the various tags you’ve put in.

Being able to identify characteristics of each strategy, will allow you to make specific tweaks which can improve your trading.

In general, the more data you have, the more likely you can find focus areas to improve on one step at a time.

 

6) Make changes step by step

Try not to change more than one factor in your trading at one time, so you can really gauge the effectiveness of your tweaks.

Sometimes we try to do too much at the same time, get overwhelmed and cause more harm than good.

So it’s better to take things step by step. Trading is a marathon, not a sprint.

 

Good trading folks!

 

X