There is a trading genius inside you.
But he’s not going to come down into your room and scatter magic trading dust over your computer. Instead, he lives in the basement, and it’s your responsibility to go down and find him.
Finding him is only half the battle. To get him to work for you, you have work for him first. You gott’a burn the midnight oil. That’s when his inspiration comes.
It’s the hard work meticulously reviewing and recording your trades that pays dividends. Not the fancy charting techniques.
The good news is technology is here to help, so we can dim that oil just a little bit earlier.
Here are five advanced tips for improving your trading using analysis technology.
Tip #1 Know your System Quality Number (SQN) in each market type
The SQN is a proprietary algorithm designed by Van Tharp that scores the quality of your system. For a detailed overview, check out The Definitive Guide to Forex System Development
While you can calculate this yourself, Tradervue (my favourite analysis software) will calculate the live SQN of your system for you.
One powerful way to use the SQN is to score how your system performs in certain market types. The premise being that your system is likely to score much higher in some market types than others. That way, you can trade the system in the market types it is best suited to, and develop other systems for other market types.
To do this, you need to note the market type for each trade. This can be done in your spreadsheet, or you can do this in Tradervue quite easily by using the tagging system to record the market type. You can then filter by the market type and run a performance report.
Tip #2 Adjust your position size based on the rolling SQN score.
The good thing about the SQN is it is calculated live on a rolling basis.
This is exactly what you need to avoid the much feared “system death”.
After a while, you will know what to expect from your system in terms of SQN. For example, you might have an SQN of 3 for your system. Each week as you track your progress, you note the rolling SQN value.
If your system keeps performing well, keep your trade size consistent. If its performance decreases, scale back dynamically.
For example, if there is a decrease in SQN from 3 to 2, you could start cutting your position size. If it falls further, you could cut yet again.
Once it gets to a point where it is performing well below expectations, you stop trading that system. Instead, look at which of your other systems could work better in the current market type.
The message is simple: trade more when you system is performing, and recognize when it changes so you can trade less when it’s not. This stops you from suffering through a slow, painful and unnecessary system death.
Tip #3 Optimize though understanding your Maximum Forward Excursion (MFE) and Maximum Adverse Excursion (MAE)
MFE and MAE studies are very useful for optimising your profit target and stop-loss placement.
MFE will tell you:
“How far your trade has gone into profit before it was closed”
MAE will tell you:
“How far your trade has gone into a loss before it was closed”
Every good trader lets their winners run, and cuts their losses early. These statistics will give you an objective view of your trade movements.
You might find that you have your targets too close, and your stops too far away. In a word, you will be able to make informed decisions on how to improve your profitability.
Tip #4 Make judicious use of tags
Tagging is a great way to ensure your reporting is as valuable as it can be when you come to analyse your system. By tagging a trade, you can then run a variety of comprehensive reports by analysing:
- Market type when the trade was entered (as outlined above)
- The name of the strategy you used to place the trade (if you are running multiple strategies)
- If the trade is a breakout, trend following or counter-trend trade
- Your conviction level of the trade
- A rank for the trade (such a A,B,C or D)
- The entry method (if you are using different entry methods or patterns)
I’m sure you can think of lots more.
Don’t worry about over-tagging. If you find you never use the tag, it’s not a big deal. If you find that you can’t live without that data, then you’ll be glad you started early.
Tip #5 The chart review process
One of the best ways to review trades is to record them on a chart.
I prefer to use Tradingview for this (not Tradervue), as it will automatically update the forward data on my records.
Here is an example of what I mean (click the play button on the chart).
If you keep good records, you will find this process quite insightful.
Here are a few questions you can ask during the review process.
- Does the trade meet your trading objectives?
- Did you/would you benefit from exiting the trade early?
- What would happen if you had a wider/tighter stop?
- Could you have scaled into the trade? If you did, could you have scaled more profitably?
- Were your profit targets well placed?
- Did you let your profits run as much as you could?
- Does the trade fit your beliefs about the market and trading?
- Were there any mistakes? Did you miss an entry, or close the trade early?
- What is the impact of those mistakes on your trading system?
- Does the trade fit the market type? Be really honest with yourself here.
Again, I am sure there are more questions you can come up with. The more introspection the more your trading genius will come to light.
Good trading may not be fun, but it is always rewarding
It might not always be the most fun recording every little detail of your trades, but at the end of the day, this is what is going to awaken your trading genius.
The carefully curated data you have worked so hard to collect is going to yield a mountain of insight that you can use to dramatically improve your trading results, and, of course, profits.
Until next time.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com. If you like Sam’s writing you can subscribe to his newsletter.