Keeping track of your trading performance

Why and how to keep a trading journal

A trading journal is a record of all your trading activity and can include as little or as much detail as you like. The trick is to figure out what information is useful to you, so you might want to start out keeping detailed records and then scale back as you reflect on what information has been most helpful over time.

Your trading journal should be based on a trading plan – what you set out to achieve and how you plan to do so. Using your journal to capture how you execute your plan (however well or poorly) and results will enable you to learn from trades and improve your performance and strategy over time.

You can use a book, a spreadsheet or even annotate screenshots of your trading charts and file them – anything that works for you that you can commit to doing regularly. One of the keys to successful trading is discipline, and keeping a trading diary is a good way to practise this. Some of the things you might want to note include:

• What you are trading, for example, the currency pair if you’re trading forex
• What your goal is (be as specific as possible)
• What your plan is – for example, when you’ll open your position, when you’ll close it and what parameters you’ll watch to make that decision
• The size of the trade you plan to make, for example, one lot
• Your trading position (long or short)
• The date and/or time of the trade
• Your reason for making the trade, such as performing technical or fundamental analysis, or responding to a market signal
• Your conviction about a trade. This is how you feel about it going in. You might have high conviction if the trade meets several of the factors you’re looking for in your analysis, or you might have medium or low conviction if you’re trying out a new strategy
• Whether you followed your plan or deviated from it (and how, if you did change course). For example, maybe your plan was to make a decision based on the daily chart, but you second-guessed yourself, opened the hourly chart and then changed your mind. Or maybe your cat jumped on your keyboard and accidentally closed your trade earlier than you’d planned. These kinds of situations won’t be reflected in your trading history, and it might be difficult to remember your reasoning or what happened later on, which is where the journal comes in handy (especially if your cat taught you something by taking a decision you would never have made yourself!)
• What was happening in the market. Again, this can be difficult to remember later on, so keeping notes can help in similar future situations
• The result of the trade and how you felt about it. Interestingly, when it comes to trading virtual money, people tend to think they won’t experience the same feelings of loss, disappointment or even anger when things go wrong as they would in a live trading environment. But our research shows that’s not the case. Losing on a trade feels awful, even if it’s not real money. Figuring out how your emotions affect your trading is a major step in improving your performance, and so noting your emotional responses can be helpful in learning to manage them

Start each journal entry before you open a trade and complete it once the trade is closed.

Key metrics

Beyond tracking your trading and learning to spot patterns through a trading diary, there are several useful metrics you can keep an eye on to measure your performance.

Win rate: this is the number of trades you closed in profit from the total number of trades made. For example, if you placed ten trades and were successful in five and lost five, your win rate is 50%. It’s important to understand, however, that even if you have a good win rate, you might still have a losing strategy (for example, if some of your losing trades were big ones that cancelled out the profit from your five successful trades).

Profit/loss ratio: known as P&L ratio for short, your profit/loss ratio is the average profit on your winning trades divided by the average loss on your losing trades over a specific period. It’s a useful tool in assessing how your trading strategy is performing, but should not be used in isolation. You can have a favourable profit/loss ratio and still have a losing strategy if your losses are significant, or if your fees on a trade outweigh your profit. A good goal is to aim for a P&L ratio of 2:1, which means you’re making double the amount of profit on trades than you’re losing.

Total return: this is the actual rate of return of your trades over a period of time. If your return rate is less than 1, you’re losing money. If your return rate is above 1, you’re making money. If it’s exactly 1, you’re breaking even. Total return is essentially a combination of your win rate and your P&L ratio. You should aim for a return rate of greater than 1 to make money.

Make use of market/trading signals: trading signals are triggers for action – they signal when to buy or sell a security or other asset, and are generated by analysis. They can be made by people who use technical indicators to develop them or by algorithms that track market action (sometimes in combination with other factors). The goal is to offer traders an indication whether to buy or sell a security or other asset, without bringing emotions into the equation. Some demo trading platforms offer market signal streams. If you’re unsure of how to start, using signals to guide your trading decisions can be a good way to get some practice and understanding of the markets. These feeds usually indicate whether to buy or sell, as well as provide information such as a good opening point, what your limits should be, what the latest price is and so on. Some platforms enable you to copy this information to your order on the deal ticket.

Start with markets you know, then expand: if you’re unsure of where to start, pick a market you’re most comfortable with and get stuck in. It might be forex or a popular index. Once you’ve developed a bit of experience and confidence, you can explore new markets and products.

Don’t be scared to lose: losing is an important part of trading and teaches you as much as your successful trades (if not more than). The demo account is a much better place to do this than the live trading environment. Although losing still hurts, it’s preferable to do so with virtual funds, so give yourself room and grace to try new things and space to not always get it right. The benefit of a demo account is that you can top up your virtual funds at no cost to you if you need to.