The trading journal
Without records you remember your winners and forget your losers. A journal is a good way to see how you're really doing.
Learning objective: After this lesson you can keep a trading journal that honestly shows your real performance.
Ask someone for their win rate and you'll get an estimate. It's almost always too high, because our memory holds on to the good moments better.
What goes in the journal
A journal fixes that. Before every trade, write down what you're buying, why, where you'll get out and how much you're risking. After you exit, note what actually happened and whether you stuck to your rules.
Following rules over results
That last point is the most important. A trade can make a profit even though you broke your rule. Then it isn't a success. It's luck, and you can't build on luck.
Patterns after fifty entries
After fifty entries you'll see patterns you hadn't noticed before. Usually they're unpleasant. Svenja found that almost all her losses happened on Friday afternoons when she was tired, and that her good results all came from positions she'd held longer.
This is about separating the quality of your decision from the outcome. Where there's a lot of chance involved, a single outcome says little about whether the decision was good. If you only judge by outcomes, you throw away good decisions that were unlucky and keep bad ones that got lucky. Experts call this outcome bias.
Recording reasons in advance
You have to write down your reasons before you know the outcome. Notes made afterwards are distorted. Once you know how it turned out, the outcome seems more predictable than it was, and your memory of the reasons adjusts. Only what was recorded beforehand can be evaluated honestly.
Evaluating the entries
Useful things to evaluate are the win rate, the average gain and loss, the expected value that follows from them, and the share of trades where you stuck to your rules. A breakdown by time of day, security or market conditions is revealing too. Be careful, though: the finer you split, the fewer trades end up in each group, and the less you can conclude from it.
Summary
- Memory almost always overestimates your own win rate.
- Write down your reasons before the outcome, or they'll adjust.
- Judge how you decided, not the single outcome.
Did you get it?
What is outcome bias?
Judging a decision by how it turned out rather than by how good it was.
Why do you have to write down your reasons before the outcome?
Because your memory of the reasons adjusts once you know how it turned out.
Which figure matters more than the win rate?
The expected value, plus the share of trades where you stuck to your rules.
Check your understanding
Your task
Create a table with six columns: What, Why, Exit, Risk in dollars, Result, Rule followed (yes or no). Enter a decision you made recently, or plan the entry for your next purchase. Write down your reasons before you know the result.
Related
- Win rate and expected valueStage 3
- Risk-reward ratioStage 3
- LiquidationStage 3
- Matching questions for this stageQuestions