Hello traders! This will be my last newsletter in calendar 2015, so I thought I would help you get started with your yearly trading review. What’s a trading review, you say? It is where open your trading journal and look back at your trading history to see what you did well, and what you did not-so-well. Do me a favor and read through this newsletter first, then go back and check your own history using this plan as a guide. Let’s go!
Because many new traders don’t keep a trading journal and therefore aren’t able to review their trades to begin with, let’s discuss why this is important. In previous newsletters we’ve explained that you should keep track of what you are good at (making money on), and keep track of what you are bad at (losing money on.) What should be somewhat obvious is that not everyone is good at the same things. This is true in trading just as much as it is in life. Some of the things to track in your trading journal are:
Were you entering this trade with a plan of day trading or long term trading? Depending on what else you have going on in your life, making the proper choice of trading style can be the difference between success and failure.
Imagine this: A retired individual who has many hours a day of free time chooses to take a long-term trade, expecting to be in the trade for weeks at a time. However, this trader also checks the profitability of his trade every fifteen minutes. With a long term trade expectation of, say, 600 pips, the trader would expect a stop loss in the neighborhood of 100-200 pips. However, as the trade progresses this trader notices retracements against him of 25 pips every few hours – and consequently closes the trade based off of a small retracement on his small time frame chart. Obviously, this trader wasn’t really trading from a long term plan. He may have thought he was, but his actions proved otherwise. Another way to keep track of this is to note which time frame charts you are using. A day trader may be looking at a 15 minute chart, while a long term trader may be trading from a daily or even a weekly chart.
Odds Enhancer Score
At Online Trading Academy, we believe that institutional supply and demand are the prevailing forces in the market. However, there are different levels of awesomeness between these levels. This awesomeness is scored through our system of odds enhancers. Some levels are just “there”- the supply or demand zone exists but it isn’t good enough to enter a trade – perhaps the zone can be used as an exit, but not an entry. Other zones are good enough to enter trades with our hard-earned money.
Planned vs. Realized Reward to Risk Ratios
This has been mentioned before when we talked about trading with the trend vs. trading against the trend. As a general rule of thumb, we expect traders to take trades that offer a reward to risk ratio of at least 3:1 (risking $100 to make $300.) This would be the planned reward to risk. When trading with the trend, the realized reward to risk is often better when using proper trade management techniques (ie., occasionally a 5:8, or even a 20:1 trade may show up when trading with the prevailing trend).
Forex Symbols You Are Trading
For whatever reasons, some traders are better at trading some symbols than others. If you are great at the GBPUSD but terrible at the USDJPY, how do you think you could adjust your plan to make more money? Stop trading the USDJPY and trade the GBPUSD! Well done, class!
There are other things that traders can examine as well, but this list should be a good start. By now I hope you have invested in some sort of software that lets you easily keep track of things/create spreadsheets. Every trade you make during the year should be entered into this spreadsheet. (If you haven’t already started this process, please start for 2016, OK? For me?) In this spreadsheet you can make it as simple or as complex as you want-from simple checkmarks in columns that represent your trading decisions to formulas that express win percentages when certain criteria are met.
If you place dozens/hundreds of trades this year, going back and examining all of them at one time will be a very daunting task, one you may have to break down this chore into months or even weeks of activity. However, the end result will be worth it. One thing to consider-we must NEVER rely on our memory of events to keep track of our successes. As human beings, we have a propensity to remember certain abnormal things more than others (you may remember that 200 pip winning trade on the USDJPY you took in April very clearly, but the 30 losing trades of 20 pips on the USDJPY blend into the fog of history). Were you then profitable on the USDJPY if those were the trades you took last year? The answer is no, but if you only remember the big winner you may continue to try and make money on the USDJPY even though it doesn’t work for you.
So, you have now gone back and entered your trades into your trading journal, keeping track of trading style, odds enhancer scores, reward to risk ratios, symbols, etc. Hopefully some “trends” of your trading success showed up. If you were successful trading the USDCAD from the long side for most of the year, and unsuccessful on all of your short USDCAD trades, I expect you should continue to trade the USDCAD from the long side until its trend reverses. Keeping track of your trading successes on a monthly or quarterly basis should allow you to be more reactive to what is working for you and what isn’t a bit quicker, don’t you think?
If you find the task of going back on all of your 2015 trades too daunting, hopefully this newsletter will inspire you and also help you start a trading journal for 2016 to make your trading much more consistently profitable in the new year!
Until next time,
Rick Wright – firstname.lastname@example.org