Do you keep a trade log recording your risk/reward parameters, results, expectancy, and other important statistics for each trade you make? If you answered no, do you experience inconsistent results and regular draw downs in your account? For most, this is not a coincidence. Trading without a trade log is analogous to finding your way out of a desert with no map or compass. At best, it is a struggle. At worst, you never make it out alive. Your trade log is your map guiding your trading by effectively evaluating your strengths and weaknesses to help you reach your goals. Your compass is your “trading framework”, something that will be covered at another time.
Your trade log supplies you with the cold, hard numbers of your trading. It is a very important tool in trading yet few traders actually “keep their stats”. On the surface, it does not seem like such a big deal. However, a trade log does more than just list your numbers. It gives you the capability to honestly evaluate your trading performance so you can understand your strengths and weaknesses. Do you even keep a list of your strengths and weaknesses as a trader? If not, how do you know what you need to improve? The trade log is the beginning of this process. In my opinion, it is equally important that you understand what you do well (so you can keep doing it) and recognize your flaws (so you can improve). All traders make mistakes, but the good ones are able to contain them so they do not incur serious damage to their accounts. Poor traders tend to compound their mistakes, which result in heavy drawdowns and uneven or inconsistent results.
Unless you are able to identify your errors and begin minimizing and eliminating them, there is no way to improve as a trader.
The most important trait for a trader to possess is the ability to take responsibility for his or her actions and their subsequent results in the trading account. As a trader, you are solely responsible for what happens when you trade. If you cannot take responsibility for your actions, you cannot accept that you need to change your trading. Keeping a trade log will help you to take responsibility and make appropriate changes to improve your trading.
Keeping a Trade Log Establishes Discipline
Winning traders have excellent discipline. They have a reason for getting in and more importantly, they have a reason for getting out. Poor traders typically trade indiscriminately and “overtrade” or make too many bets. This is a major mistake that leads to losses and can leave traders emotionally off-balance. Once you start logging trades, you’ll be thinking about why you’re taking trades and how to construct them versus trading indiscriminately.
A Trade Log Allows You to Objectively Evaluate the Numbers
You’ll figure out quickly whether you are doing things right or not. Winning traders enjoy reviewing their “stats” because it’s rewarding to follow your style and make trades you feel good about. Poor traders have a tough time keeping their stats, let alone reviewing them. It isn’t psychologically pleasing to review losses and think about lost money but you can’t effectively evaluate your trading without keeping the numbers.
Are you too risk-averse?
These traders keep stops too close and get stopped too often. This means you are keeping stops within normal ranges of volatility. This is frequently seen in day-traders who keep stops far too close and are regularly stopped out. Many traders like this are under the guise they are managing their risk effectively when they are bleeding to death by a 1,000 cuts. Worse, these types typically take profits too early because they are unused to them and “want to lock in profit”. Their win/loss ratio doesn’t match the magnitude of their winners and losers. Lots of small losers with even smaller winners equal consistent drawdowns.
Do you wing it?
These traders have no plan and simply throw around trade ideas with no real idea or understanding of why they’re doing it. They will occasionally hit winning trades, even big winning trades, but they are capable of giving it right back to the market.
Do you use poor position sizing strategies?
Are you betting too much and taking on too much leverage in losing trades? Are you too conservative with winning trades?
Do you ride losers?
These kinds of trades start out normal but turn against you at some point. These traders typically do not have specific exit stops and limits. When the trade starts going sour, the losses multiply and the trader’s psychology changes. The idea of a winning trade turns into a position that one can only “hope” to come back to even. The losses multiply and the trader digs his or her heels in. Margin calls are met and then met again. A once annoying trade has now snowballed into heavy losses. Eventually, a large and unnecessary loss is taken.
Do you take contained losses and understand why you lost?
Paradoxical to conventional thought, successful traders take losses, but they are defined and manageable losses. More importantly, when you take a loss, you should strive to understand why you lost. Was it a poor entry or exit because you were emotionally compromised? Was it poor risk management while the trade was on? Was a significant technical level broken? Did the market unexpectedly get volatile and your trading strategy simply didn’t fit the environment anymore? The point is, if you identify why you lost, you can improve your trading.
Do you utilize appropriate position sizing strategies?
Successful traders fully understand the concept of leverage in futures so they know when to use it and when not to use it.
Have you developed a framework for your trading?
Successful traders use a methodology or a way to perceive or give context to what is they believe is happening in a market. Are you a systematic trader using certain technical rules to govern your trading (e.g., a simple moving average(s) crossover)? Are you a rules-based discretionary trader using specific rules for order entry and exit? Are you a discretionary trader who has no real rules over the long haul? Successful traders tend to be systematic or rules-based discretionary traders. Most average traders are discretionary traders, thus, they are losing traders.
There are many trading concepts we have just covered and all of them relate back to keeping a trade log. Let us examine the trade log to see how we set it up and use it.
Trade Log Format
The table formatting is as follows: contract traded, buy/sell, entry price, exit price, risk (in $), per unit risk, reward (in $), and per unit reward. You will notice that this trader begins trading with $25,000 in her account and decides her per unit risk is $500, or 2% of the account opening balance. Per unit risk and reward is a very important concept in trading. You’ll notice with this trader, the most she is willing to risk going into a trade is 2 units of risk (2R or $1,000). This trader did an excellent job of containing losses as she stuck to their plan of never taking losses bigger than 2R. On the other side, the trader is able to put herself in a position for a reward greater than 2R.
Any trades are educational examples only. They do not include commissions and fees.
As you can see, a trade log is a valuable tool needed for successful trading. It will begin to shine light into your trading habits and the forces you to evaluate your trading decisions. Over time, you will learn the “expectancy” and distribution of your trading. If you find that you do not like your results, you must be willing to evaluate your trading in an honest light and begin making the necessary steps to improvement. The trade log can immediately impact your trading and your bottom line, so I encourage you to make it an integral part of your trading.