If you’ve been following me for a while, you probably know that what I consider to be “the Holy Grail of trading” is post-analysis.
Post-analysis is the process of reviewing your past trades, analyzing your mistakes, finding ways to avoid those mistakes, and improving your trading strategy.
Now, of course, the only way you have for being able to review your trades is to get into the habit of journaling your trades, recording every single trades you made.
I strongly believe that you just can NOT succeed in trading if:
1- you don’t keep a trading journal
2- you don’t review your past trades
My Trading Journal
Some of you asked me how I record my trades and what data are important to keep.
First of all, my method is quite rudimentary and is in no way the best journaling method out there. There is no doubt that you could find better ways to journal your trades. However, my way gets the job done, and I’m used to it.
I’m old school. I use a very simple Excel spreadsheet where I record manually every trades I take.
Now what should you include in your journal?
What To Include In Your Trading Journal?
Basic information to include in your journal BEFORE entering a trade:
1- Entry date
2- Symbol (stock ticker, forex pair, …)
3- Type (Earnings Base breakout, pullback to moving average, reversal off previous support, consolidation, bear flag breakdown, …)
4- Position size/quantity
5- Entry Price
6- Stop Loss Price
7- Potential % Loss if Stop Triggered (calculated automatically)
8- Potential $ Loss if Stop Triggered (calculated automatically)
7- Entry Commission
8- Net Cost (calculated automatically)
9- Reason for Entering the Trade
You can see that by following this process, you know where to get out prior to entering a trade, should the trade go sour (note: 60% of my trades go sour ;-).
And writing the reason why you enter the trade helps reduce our tendency to overtrade, to enter trades outside of our own trading strategy.
Basic information to include in your journal as soon as you exit a trade
10- Exit Date
11- Exit Price
12- Exit Commission
13- Exit Net Profit/Loss
14- R-multiple (calculated automatically – google “Van Tharp R-multiple” for more information)
15- Reason for Exiting the Trade
Optional information to include in your journal
Now, as indicated, those are the basic information you must include in your trading journal.
Depending on your needs you should include any information that could be useful for improving your own trading strategy.
Here are a few examples:
– Chart snapshot upon entry
– Chart snapshot upon exit
– How am I feeling as I enter this trade (emotional & physical analysis)
– How did I feel when I exited this trade
– General Market state upon entry
– Breakout type (earnings, FDA drug approval, new contract, analyst upgrade, …)
– Earnings/Sales quality (E.g.: YoY growth %, QoQ growth %, record EPS, growth acceleration, YoY loss to profits situation, …)
– Stock Float
– Company market cap
– Stock stage (see Stan Weinstein’s book “Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets” for more info on Stage Analysis)
– Base count (see William O’Neil’s book “How to Make Money in Stocks” for the base count)
– IBD ratings
– Entry OHLC data (open price, high, low, close)
– Moving Average (e.g.: above upsloping 50dma, …)
As you can see, the data you could record are limitless. It all comes down to what is relevant to you and your own trading style.
Keeping those information will allow you to know the truth, not only about your trading, but also about your own behavioral patterns, and your trading strategy.
NEVER assume that what you read in a trading book is true. You may find for instance many books recommending you to buy oversold stocks when the RSI is below 30 or always buy at the end of the day right before the close. By recording those data in your journal, after several hundreds of trades, you will be able to assess the veracity of such claim, and you will be steps ahead of many traders out there.
Tracking Your Performance in Real-Time
Apart of having a ledger where you can go back and analyze your past trades, journaling your trades also is a way for you to measure and track your edge and your performance in real-time.
Indeed, your journal should allow you to know the truth about your trading, from a mathematical standpoint.
Armed with a simple Excel spreadsheet for instance, and a little knowledge in Excel formulas, you can easily extract “vital” information about your trading, information that will make you understand exactly why you are – or you are not – making money in the markets.
Here is the information I personally use:
1- Number of trades
(I’m always trying to reduce that number since I have a strong tendency to overtrade.)
3- Number of winning trades | Number of losing trades
4- Cumulative profits | Cumulative losses
5- Average $ Profit | Average $ Loss
6- Average % Profit | Average % Loss
(This allows you to know when you have a decent profit in a position, based on your historical average, as well as when a loss is getting out of hand.)
7- Max $ Profit | Max $ Loss
8- Max % Profit | Max % Loss
(Allows you to know when you have screwed up. Or to find out that there are certain trades you should maybe avoid.)
9- Winning Trades Average Holding Period | Losing Trades Average Holding Period
(Allows you to see right away whether you hold your winners longer than your losers.)
10- Winning Trade Longest Holding Period | Losing Trade Longest Holding Period
11- Winning Trade Shortest Holding Period | Losing Trade Shortest Holding Period
12- Win Rate
(When this percentage gets too low, the market conditions are usually not favorable for my strategy. Or I’ve been overtrading…)
13- $ Expectancy
(That’s how much you can expect to make, on average, for each dollar you risk, in other words, the R-multiple.)
14- % Expectancy
(That’s how much you can expect to make, on average, percentage-wise.)
15- Expected Value
(That’s how much you can expect to make, on average, on any trade.)
16- Kelly Criterion
(That’s the optimal position sizing formula, based on my own stats, that I personally use in my trading. I actually use half of that value, “half Kelly”.)
In my spreadsheet, I like to monitor those values in real-time for 3 different periods: Last 3 months, Last 6 months & Last 12 months.
This allows me to know exactly:
– whether I’m actually making money on average
– why I’m making/losing money, and when my expectancy is starting to stall
– whether I’m holding my losing trades too long
– whether I should increase or reduce my position sizes
– whether market conditions are favorable to my trading strategy
Here is an example of what it looks like:
Do keep in mind that this is far from being the best visual way for interpreting those information. I’m just giving you an idea of how I do it. I’m personally used to it now.
As a matter of fact, I’m currently working on improving my current spreadsheet.
I’m working on adding:
– a chart that shows my equity curve
– a chart to show the distribution between losing/winning trades percentage and the number of trades
– the maximum number of losing trades in a row (longest losing streak)
– my risk of ruin
– max equity curve drawdown
– separate information for different strategies
– sharpe ratio
So here you are. You now have an idea of what information you should record in your trading journal, as well as, the information that you should monitor regularly to make sure that you are and you stay profitable.
Again, journaling your trades, doing real-time analysis and reviewing your past trades is, in my humble opinion, the Holy Grail of trading.
There is not secret recipe. It’s just having the discipline to treat your trading as a business.
And if you are not doing that, you don’t need to search anywhere else for the reason why you are not profitable.
If you’re too lazy to record your trades & review them on a regular basis, you’re basically too lazy to make money consistently in the market.
So do it, and you’ll gain a skill (being consistently profitable) that has the potential to make you more money that you ever thought was possible… And the financial freedom that comes with it.
How do you account for multiple buys and sells? Example… you purchase PYPL on 4 different days at say 58, 59, 60 and 62. Do you break each entry down separately and calculate the % position sizing for each, the stop loss for each etc… or do you simply update your spreadsheet to show the average?
Thanks in advance.
Good question Chris,
I used to treat additional buys and partial selling as the same trade. But now I treat them as separate trades as each have different stop losses (R).
I’ve been following your blog and posts on Twitter for several months and your approach has been transformative in my education. Thank you for your selflessness.
I was hoping you might be able to point me in the direction of a website or service that tracks quarterly EPS and Revenue winners? Identifying fast growing companies early based on strong fundamentals is what I’m after here.
Also, you tweeted a while back that you were off to Europe? France? I’m an airline pilot and I fly to Europe several times a month. I realize the continent is huge but I’d love to catch up if the stars align and I’m in the same city/area as you. I share a passion for investing and a similar admiration for Jesse Stein’s work as well as your own.
I’m humbled and honored by your comment. Thx Chris.
For earnings winners I use Zacks. On that website, you can find (for free) earnings (before non-recurring items) and earnings surprises, as well as revenues and an earnings calendar. There’s also a powerful stock screener.
You can also find quarterly GAAP EPS and revenues on Ycharts and Gurufocus, and calculate quarter on quarter data in an spreadsheet for instance.
A pricey alternative is Marketsmith.
Or, if you’re good with Excel and not afraid of a tiny bit of programming, you can use this fantastic (and free) Excel add-in: http://ogres-crypt.com/SMF/
It allows you to grab data from almost any website and import them directly to your Excel spreadhseet.
Always happy to meet with traders. I’m currently near the French Alps and quite far from an airport though. But if you come down to Bangkok someday, do shoot me a message.
Hi Fred, thanks for sharing. Very inspiring.
Usually how do you get out of a profitable trade? Would you wait till the price reaches your target price, or would you use trailing stop? Thank you.
Hi. Thanks for your comment.
I think this is a part of your own strategy that you have to decide by yourself, based on your average loss, time frame, and position size.
About my own strategy, I personally do not have price targets. I ride my winners using moving averages so the biggest ones not only pay for all my losing trades, but also give me some profits. Cheers!