We meet new traders all the time, and one problem area that stands out is how few new traders utilise a trading log to help them remain consistently profitable over long term time horizons.
The overall importance of this cannot be understated – having a tool that allows us to track our key trading metrics whilst providing an insight into our past activity can open up a host of new ways to improve our trading.
It is interesting to understand why new investors fail to pick this up, and the answers are usually simple.
- There is so much information & data out there, so much so that vital tools are not picked up by those new to trading the financial markets.
- New traders typically have poor risk management strategies – this leads to a lack of attention given to professional tools and analytics.
- Lack of a solid trading plan – beginners like to jump in at the deep end and learn as they go, this is usually very risky as no trading plan is made prior to becoming active in the markets.
- Lack of automation – there are automated solutions out there, Bloomberg provides awesome trading journal templates that can be easily integrated with excel. But this is at a cost of $25,000 a year.
If you want to trade the way Wallstreet does, then utilise data via a trading log to help with risk management and maintaining a trading plan.
This is seen as an immediate way to help improve a traders results.
(Bloomberg Trading Log Plugin, 2018)
A common question we face is:
But my trading platform already has a trading log, do I need to spend the extra effort making my own?
Answer: This all depends. It is possible but not likely that the trading platform you use has the statistics and data important to you and your style of trading. Generally speaking, the logs provided by trading platforms are lacking the functionality and customisability required to make this a good fit for any particular trading style.
As a trading platform they are concerned with catering for the mass majority and tend to stay clear of specialised or niche indicators that are style dependant. Another issue we see with platform-based trading logs is the sheer amount of entries gathered and collected. Without prior planning to organising this data and understanding the data points that are important, it is easy to get lost in often irrelevant information.
It is important to plan a trading log before you start – and to create it to fit the style of trading that your trading plan dictates. We find this helps traders stick to the trading plan in a more robust way, and the process of looking at historic data can provide hard numbers on what went right, what went wrong, and how to do better next time.
WHAT IS A TRADING LOG?
A trading log is generally considered to be a record of historic trades that can be interpreted to improve a traders chances at making money.
Trading logs have been documented as being used as early as the 17th century.
This account from the time highlights the growing speculative nature of traders in what was the first stock exchange to exist.
‘This little game could bring in more money than contracting charter parties for ships bound for England’, wrote Rodrigo Dias Henriques to Manuel Levy Duarte on 1 November 1691.
Dias Henriques was referring to the ‘game’ of trading shares of the Dutch East India Company (Verenigde Oost-Indische Compagnie, VOC, founded 1602) and its derivatives on the Amsterdam securities market.
Ever since its opening in 1602, speculators, traders and brokers have kept meticulous records – what today we could call a trading log or journal.
A trading log should generally do two things:
1. Holds the trader accountable and increases awareness
2. Adapts as the trader develops, starting from non-technical issues such as stress, emotions, discipline and mental areas to quantitative metrics that are specific to asset-class and the unique style of the trader
A trading journal as we stress throughout this article must be tailored to the individuals needs.
A basic journal is a good starting point, and better than no journal at all – but adapting it is key to getting the best outcomes.
WHY DO I NEED A TRADING JOURNAL?
As we have mentioned above, the reasons for using a trading journal are numerous. Another way to explain the advantages of using a journal is to describe it as a series of questions. With an organised and relevant log of the trades executed, it is easy to answer the questions below. This can make the difference between profit and loss – and so it’s important to understand.
“A disciplined trader is a profitable trader and keeping a trading journal is the first step to building your discipline.” – Baby Pips
HOW CORRELATED ARE YOU WITHIN THE FINANCIAL MARKETS YOU TRADE?
From an analytical perspective, it is useful to understand if your trades generally perform as well (or as badly) as the wider market does.
If the trades closely follow the performance of the wider market, it could be argued that the trader is performing relatively well but with room for improvement.
A low correlation with the wider market is often typical with traders who are creative during the idea generation process.
WHAT IS THE PROFITABILITY OF YOUR STRATEGY ON A RISK-ADJUSTED BASIS?
With the previous example in mind, if the overall performance of the trades executed are generally in-line with the overall market then risk becomes important. Ideally, the trades would be performing better per unit of risk taken compared to the wider market in the asset classes traded.
A traditional measure of this is the Sharpe Ratio – where a high Sharpe Ratio suggests that the trader is both profitable, and accomplishes this through consistency which indicates a solid risk management plan is in place.
IS YOUR PERFORMANCE BASED ON CURRENT MARKET CONDITIONS?
A longer track record (we are talking years here) is generally required to effectively evaluate the performance of a trader in terms of market conditions.
If you have traded in both volatile and non-volatile markets, as well as uptrends, downtrends, and ranges (and have kept a solid trading log!) then its easy to start unpicking data to drill down into insights that can help you improve.
WHICH AREAS PERFORM BEST?
The answer to this question is usually unique to the trader in question. Keeping an active log will help pin-point relevant information to help answer this.
A few of the first questions to ask would include:
1. Are you highly profitable in a particular market?
2. Are you highly profitable with a particular trading strategy?
3. Do you employ multiple trading plans and strategies across different asset classes?
4. Does your profitability come from short or long term plays?
5. Does the time of day have an impact on your trading?
HOW MUCH DO YOU DRAW DOWN?
To clarify this for beginners, in terms of trading a draw down is associated with a drop in equity (or value) in the trading account.
This may be qualified by looking at the decline from a high peak to a pullback low of the equity levels in the traders account.
Almost a follow-up on the profitability of the strategy on a risk-adjusted basis, but this question is concerned with the 90/90/90 rule.
This rule specifies that on average 90% of traders, use up 90% of their initial capital within 90 days. I.e. blowing up your account.
Having a good track record here indicates the trader performs well both defensively and in offence.
DO YOU EFFECTIVELY MANAGE YOUR POSITION SIZES?
This question can highlight a stark contrast between trading styles that often reflect the personality of the trader.
A trading log would be used to highlight trades by capital investment to assess how size of investment impacts profitability.
An example of this would be if the trader is mostly profitable on large, aggressive trades, is easily deduced from good record keeping.
Indicators such as level of conviction (and its impact on profitability), i.e. do you trade ideas you have conviction for really well or does this lead to less risk management and overconfidence?
HOW IS YOUR PERFORMANCE COMPARED TO LAST MONTH/YEAR?
This question approaches the area of psychology and its impact on profitable trading.
Some simple ideas for this include:
1. During negative/positive times in your life did you trade better or worse?
2. During times of losses did you dig yourself a deeper hole or manage to turn it around?
Identifying these patterns, and which ones stop you trading effectively can help change the approach to trading you decide to take.
When working in the commercial investing world, risk compliance offers will sometimes force traders to take a few days off – there are times when not trading at all can be the best move to make.
“The only way you get a real education in the market is to invest cash, track your trade, and study your mistakes.” – Jesse Livermore
TRADING LOG POTENTIAL
Its all about the data. These historical statistics can be interpreted to provide meaningful insights that turn into actionable steps to improve your trading strategy. The data collection is the first step, the second step is undertaking analysis on that data. This can be done in terms of context, by comparison to the trading plan or by any other measure or indicator that can provide a statistically significant insights. This will be different for each trader.
The type of asset-class traded, and personality of the trader means that an individualised approach is needed to a trading log for it to provide the most benefits. Worth noting is that while collecting data is relatively straight forward – interpreting that data can be more challenging. If a bad interpretation is made, this could damage the traders ability instead of helping it.
If in doubt about interpreting your trading log you should speak to an investment professional who has expertise in the asset-class or strategies the trader utilises. The point of a trading plan is to improve performance – it does this by providing a more comprehensive understanding of the data than would otherwise be easily deduced. Looking at specific variables provides insight into a focused area, such as a specific market or strategy.
This helps in optimising and refining the trading log to provide better future results. Further expanding on the concept of variables that can be logged, here are a few additional ones to consider adding to your journal:
For day traders:
1. Amount of volume traded on the open
2. Size of the range for previous day
3. Economic data releases (such as central bank)
4. Optimal time of day to execute trades
5. Optimal market conditions for your strategy (i.e. does it perform well during volatile and non-volatile conditions?)
For fundamental traders:
1. Index or asset-class volatility
2. News that has an impact on the asset-class traded
3. Political actions that create opportunities/threats
4. Exposure to particular asset-class
5. Dividend yields
This is just a starting point, a few ideas to get going on creating a first trading journal. It is in no way exhaustive (in fact, it’s the opposite) and we recommend you take your own unique needs into consideration when building this type of journal.
It is also clear that this all requires pre-planned preparation. Without knowing what data to capture, it can be difficult and often not possible to go back to fill in the blanks. This is generally the case with anything that is non-standard and unique to you, as well as most contextual and subjective pieces of data.
“Make a trading journal your first trading habit. It will become the key to all your good trades in the future.” – Investopedia
BUILDING A TRADING JOURNAL TEMPLATE
Building your own trading journal from scratch can be daunting process, but it doesn’t have to be.
A basic journal can reduce complexity and help highlight factors that matter the most – those that improve profitability.
Here are the most common (and required) entries of a basic trading journal:
2. Time of first trade execution (usually buy)
3. Time of second trade execution (usually sell)
4. Record of entry and exit price (what you paid, and what you received back)
5. Stop-loss price or data (and you should normally have a stop-loss in place)
6. Size of position taken
7. Profit & loss on trade
As a first-step towards taking your trading history seriously, this is a good place to start. Another popular variable to track is the traders own win or loss rate expectancy. This can help provide an indicator as to the reliability of the system being tested.
To find out the expectancy of a win or a loss on a particular trade we use the following equation:
E= [1+ (W/L)] x P – 1
E = Expectancy
W = Average Winning Trade
L = Average Losing Trade
P = Percentage Win Ratio
Let’s put this into practice:
When looking at a trade log of 20 trades, in which 12 of them were profitable (wins) and 8 of them were unprofitable (losses).
This gives us a result of a 60% win ratio.
If the total gain from the 12 winning trades amounted to £5,000 then each winning trade would on average make £416 (5,000 / 12 = £416).
Should the 8 loosing trades total a loss of £2,000 then the loss on average per trade made would be £250 (2,000 / 8 = £250).
Plug this in to the equation provided above to result in:
E = [1 + (416/300) ] x 0.60 – 1 = 0.432%
0.432% is considered a good return.
In essence it means that for every £1 spent there is a £1.43 return.
Another way of looking at it would be:
((416 x .60) – (250 x .40)) = £149.6 profit per average trade
£149.6 x frequency (lets say we make 50 trades a year) = 149.6 x 50 = £7,480 average profit per year.
Start with a list of all the trades and dates, and create new columns for any data you think it might be worth recording – later you can test the data vs results to know for sure. Much of a traders time is spend experimenting with new ideas and models, and this includes the trade journal.
The use of Excel allows us to easily calculate any mathematics that is required for the particular data we choose to record. Furthermore, Excel is useful in reducing user error in calculations. Ultimately, it’s also important to take your own skills within Excel and spreadsheet modelling into account.
It is important to understand why you have decided to take a trade in the first place.
EACH FACTOR PLAYS AN IMPORTANT ROLE
For new traders we always advise including the following to start off:
1. Fundamental Factors
2. Technical Factors
3. Psychology Factors
The reasons for taking a trade a likely to be as numerous as there are stars in the sky, so here we will look over a few common reasons:
Apple continues to increase sales in-line with expectations and recent tax changes place it in a good position to repatriate over $100bn in foreign profits
The downward trend has levelled off at a 90 day low, indicating a good short term entry point.
The markets are increasingly surprised by Apples profitability results, and with strong growth in previous quarters, this trend is likely to continue.
As this happens, further institutional investors will come onboard, raising the price of Apples shares further.
One of the fundamental keys to success in using a trading log is to use it every day, and as another rule to follow on the path to successful and profitable trading. Most traders who have more than one type of methodology or way of trading will keep a different trade journal for each type of trading process or setup. Mixing these systems generally provides to much data and so it becomes increasingly difficult to interpret due to issues such as data redundancy.
This does mean extra work – logging in the data from each trade, and it takes even more time to analyse. New traders often find ways to improve the trading plan followed from the insights provided by this log. It is also an effective tool to help manage risk – which is extremely important for long term profitability. The asset-class, and trader type tends not to matter, trading logs are universally considered an invaluable tool to the traders arsenal.
Trading is a skill that can be picked up by most people, but the learning process doesn’t end. It can take 1-3 years to become a proficient trader and the learning never stops.
It is exciting to look back on a trade journal to see how progression happens, it can be extremely motivating to note these improvements.
ONLINE TRADING JOURNALS
From Excel Spreadsheets to advanced API driven Bloomberg plugins, the options available to use can be staggering.
As a beginner, we recommend you stick to the tried and tested method of spreadsheets, that have been used by traders, both amateur and professional since the 1990s.
While this is increasingly an “old” technology, it is still the primarily tool of choice for professional investors all over the world for a whole array of reasons.
From building financial models, to testing and conducting analysis – a good working knowledge of Excel can only do good things for your time in the realm of investing and finance.
TRADING JOURNALS COMPARISON
As well as raising awareness of the general need for traders to use a trading plan, below we have curated a list of off the shelf solutions that are used commercially and by home traders. It is usually recommended to create your own trading plan and trading journal or log from scratch. This way it will be unique to you, and your specific needs when executing a successful trading strategy.If you just can’t wait, feel free to take a look at these products below, which we tried and tested during the making of this post.
|Product Name||Assets Captured||GAAP Compliant||Price|
|Horizon Trading Journal||Equities||No||£12 per User|
|TPG Trader||Equities, Bonds, Derivatives, Exotics||Yes||From £200 per month|
|Edgewonk||Forex, Equities, Futures, CFDs, Spreadbetting||No||£125 per user|
|Trading Diary||Equities, Options, ETFs, Mutual Funds, Futures, Forex||No||£110 per user|
|Trading Consistently||Equities, Options, ETFs, Mutual Funds, Futures, Forex||Yes||£12 per month|
|Trading Journal Spreadsheet||Equities, Futures, Forex||No||£139 per user|