Lesson 27: Keeping a trading journal to improve its trading strategy

Repeating it often, keeping a trading log is an indispensable exercise for any trader, beginner or experienced. Keeping a newspaper helps to identify its strengths and weaknesses and, above all, to evaluate scientifically the validity of your trading strategy, in order to modify and improve it.

How to build a trading log in practice?

To the extent that trading logs serve to evaluate and improve trading strategies, the first prerequisite is to have established a precise strategy, and scrupulously stick to it.

You must have defined the signals and factors that govern your opening and closing positions. Generally, a trading strategy can be considered to have three components: Input signals, stops and limits selection elements (risk management) and invalidation signals.

Once the trading strategy has been defined, it must then be scrupulously applied to each transaction, keeping the history in the trading journal, which is most frequently presented in the form of a spreadsheet with more information Possible for each operation: Input and output date / time, direction, currency, input signals, output signals, etc.

How to draw useful information from your trading log?

The primary purpose of a trading journal is to spot "patterns", winners or losers. In other words, situations in which you win the majority of trades, and situations in which the majority turn out to lose.

The conclusions that can be drawn from these observations can be very simple. For example, you may find that certain hours or days are not suitable for your strategy, or that the strategy works less well for some pairs than others.

The conclusions can also be more technical, and concern the signals and confirmations that you use.

The general idea is to emphasize what works, and to remove what does not work, or not well enough.

Perseverance and discipline are essential for the trading log to be valid

Indeed, if you do not scrupulously apply the same method to each trade, you will not be able to evaluate your trading strategy. You have to "standardize" and cut out your trading decisions step by step so that you can act exactly the same way in each trade, so you can accurately spot what works and what does not.

It is therefore also necessary to "leave time to time" and wait for a certain volume of trades before evaluating a strategy and thinking about modifying it.

We estimate that at least 25 to 30 trades are needed to evaluate a trading strategy and begin to make improvements.

The advantage of approaching trading scientifically

When we follow a precise and methodical trading strategy evaluated by a trading journal, we have a roadmap that tells us what to do at each step, and also a method to monitor the performance of this method. The "artistic vagueness" no longer exists in this case. The more your reasoning and your decisions will be "scientific" and will rely on specific and concrete factors, the less emotions will influence your trading.

But what is a scientific reasoning?

One can reason like a scientist without having any experience in science: Scientific reasoning is an empirical reasoning, based on observation. We define a precise method (theorization), apply it scrupulously (experimentation), monitor its results (analysis), draw conclusions (improvement of the method), then apply these modifications scrupulously, experiment again , And evaluate the new results. We experiment, we observe, we improve, we experiment again, and so on.