Most traders know it’s important, but few have the discipline to do it. Furthermore, even fewer traders understand how to properly exploit the information in it. Of course, we’re talking about record keeping in a Trading Journal. Unfortunately it’s one of the boring aspects of trading, but just as good businesses do their book keeping, good traders that treat this as a business should have flawless records. In this article I’ll show you which details I keep, which details I leave out, and how I use my trading records. Finally, we have a free MT4 script that can help you build your own journal.
The Importance of a Trading Journal
Keeping good records allows you to spot right away where your problems are. For example, at a certain point of my career, I had a tremendous win/loss ratio but I was losing money. My journal told me what I was doing wrong: cutting winners at their knees. My journal also told me what I was doing right: cutting losses equally fast. My journal told me my average win, which was half that of my average loss. So already, I had information to incorporate into my future trading habits to turn things around.
Other questions a well-kept journal can answer:
Am I cutting my winners short?
Start by thinking of your plan: what was your initial objective for the trade? Was it means to be a swing trade that you transformed into a day trade? Was it a day trade that you were hoping to roll over into a swing trade? Where did you exit the trade?
These questions can be answered if you keep track of the “passive management” test: what would have happened if you did not actively manage the trade? If you can get better results by simply applying a “set & forget” method, then do so.
Also, it can straighten your mindset. You may think you’re getting out of trades early because you’re scared. But really, it’s a product of not reviewing your records and finding out exactly what happens in the majority of your trades when you manage actively and when you sit tight. So using your blotter, you can find out why you get out too early.
Let us also cover the other scenario: maybe your trade management is not the problem, but you are cutting your winners short. So instead, take a look at how far your trades go after you exit. Are you giving up a good portion of Favourable Excursion (MFE)? Get back to the drawing board and find a way to incorporate this into your trade management plan. Would you have been better off using a trailing your stop? And on what time frame? Upon which considerations? This is all hard work…but it’s worth it.
Another issue you can solve is your Maximum Adverse Excursion (MAE). How far do your winning trades go into the red before they go into the black? If you trade from the same angle for any length of time, you’ll notice a pattern. You’re journal will capture that pattern for you and will be able to say whether 20 pips is your average MAE…or 10 pips…or 50 pips for larger moves or more volatile pairs. And remember: the efficiency of your entries will need work if you suffer intratrade drawdowns that are as large as your win. The less the trade goes offside before trotting along to target, the more efficient an entry system you have.
Lets put this into perspective: if your timing is good and you realize that your trades have an average MAE of 30 pips, and you are currently using 70 pip stops, then you can use a tighter stop, which will allow youto raise your position size! Your winning percentage will probably drop a little, but if you’re consistent, your expectancy should rise a lot.
EurGbp 1H Chart – A consolidation breakout should not require a very wide stop.
If you’re playing breakouts with wide stops, you are diluting profit potential.
How can I lose less?
Is there a common denominator linking together your losses?
– Are you trying to “move stop to breakeven” too soon? Most likely you are trading your equity and not the market movement.
– Are you trying to squeeze too much juice out of them, rolling over every trade? Unfortunately, you can’t expect each trade to be a runner. So pay attention to the clues the market drops you!
– Are you trying to pick market turns? Fading trends is generally a high risk endeavour. If anything, stops on contrarian strategies should be very tight.
– Are you adopting some indicator to time your entries?
– Are you not considering scratching your trades at some point? Or are you simply not following your own rules? Are there certain days of the week (like Mondays or Fridays) that seem to produce constant losses?
Whatever the issue, use the journal to identify it and fix it.
Resist Temptation to Optimize Your Trading
One big issue, when it comes to journals, is that traders view the numbers on the page as being “separate” from their own decisions. So first we need to set something straight. In order for a trading journal to make sense, you need to use a consistent method. Wash, rinse, repeat. Only that way will your trading journal give you realistic information.
Stated otherwise: if you keep changing your approach, or changing your trade management rules, or changing your money management rules, your journal will not be useful.
With that out of the way, what is another pot hole that traders hit when reading through the journal in search of answers? Optimization. You can’t treat the numbers simply as numbers. The numbers are derived from your trading process. For example: if your MAE is much less than most of your trades, go and see which setups they belong to (maybe breakouts?). Go see what setups require that kind of wide stop loss (perhaps pullbacks?). In other words, understand the principles behind certain requirements. Understand the market structure that requires certain action.
Also, if your MFE is high but your overall profit is low, go and see what happens during the trade. Are you holding too long? Are you scaling out of the trades? Once again, go and revisit the principles you are applying, that create the numbers you see in your journal. Don’t optimize the numbers.
An Easy Way to Create a Journal
For the longest time, I kept hand-made trading journals. But it does get quite time-consuming and so a tad of automation can help. To do this, here is an MQL4 script to extract the trades from the Account History tab.
Courtesy of Craig Consulting
The script will only read those records in that tab. Adding the script is like adding an Indicator or EA.
– Open the Data Folder window (File -> Open Data Folder).
– Navigate to the MQL4/Scripts folder and copy the AccountHistoryScript.ex4 in to there.
– (You may have to restart MT4 to get it to show, but try without at first)
– Close the data folder window
– Open the Navigator window in MT4 and go to Scripts – you should see the AccountHistory Script.
– To execute, drag it to any open currency window.
– The input window will appear
– Change the name of the output CSV file if you want and then hit OK.
– The script will run and any messages will be in Experts tab.
– The output file is in the MQL4/Files folder which you get to with File- -> Open Data Folder. You should see the Account History.CSV file (or whatever name you used) in that folder.
– Open the file directly with Excel.
What your output file should look like
Which Calculations I Have In My Trading Journal
N° Trades: Count all the values in the p/l pip column.
%Win: (Count all the positive values in the p/l pip column)/N° Trades
%Loss: (Count all the negative values in the p/l pip column)/n° trades
Longest Winning Streak: count the longest streak of winning trades not interrupted by a loss.
Longest loosing streak: this is a potential measure of your Drawdown
Risk per Trade: how much you are going to risk on each trade. I like to keep this value constant as a % of my equity. In the example, it’s 0.1% of whatever the current total equity is. Knowing off the bat how much money I’m risking allows me to calculate the position size, based on the number of pips between my entry and my stop loss.
Position Size: (Money Risked/(n° pips to stop loss* money value of 1 pip investing 1 lot))*1 lot
Example: (10 euros/(10 pips*7 euros))*100k = 13655 = 14 microlots (rounded off the the closest thousand)
Avg. Win: (Sum the values in the %R column if they are positive)/(Count the values in %R column if they are positive).
Avg. Loss: (Sum the values in the %R column if they are negative)/(Count the values in the %R column if they are negative)
Return Quality = Standard deviation of the values in the %R column.
Expectancy = (%Win * Avg. Win) -absolute value of (%Loss*Avg. Loss), which should be above 0.5
Expectation (or Opportunity) = Expectancy * n° trades/day = avg. Daily expected win/loss in terms of R
System quality = Expectation/ Return Quality, which should be above 0.5
I personally enjoy the “manual touch” of working with my own trading results. However, expecially for those people that have less time to dedicate to the process, an external application can be beneficial. For example, under the resource section of our website we listed one of these external applications we particularily like: TraderVue.
We have previously written about the benefits here
Over to You
So there you have it! Now you can go and build your very own journal and track your progress. Do not underestimate the benefits of doing all this work. At the very least, when you get to the point that you want to solicit funding, you’ll be way ahead of the competition. Those heavy hitters will turn their backs at the first indication of inconsistency or bad record keeping.
About the Author
Justin Paolini is a Forex trader and member of the team at www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.