The Risk of Trading: Mastering the Most Important Element in Financial Speculation

DEVELOPING A TRADE JOURNAL

Risk-based trading is founded on the basis of using historical trade data to make future trade decisions. Having an easy-to-use record repository for this data is essential for performance assessment. Many track their trades with a simple date, security symbol, number of shares or contracts, win-loss result, and dollar impact on the trading account. It is a much better foundation than one who doesn't track activity at all, but what exactly does this simplistic journal tell you? Win-loss percentage? Average number of trades taken per day? Overall impact to your trading account? Perhaps all three. In order to use your data effectively, we need enough data to be able to track specific aspects of plan compliance and risk. A trade journal could be quite deceiving if you have a great win percentage and some initial profits but execute a poor risk management plan. If you have a good record but continuously break plan rules to do it, your plan will not tell you that you are on a path to trader destruction. For an effective plan that adds value to your business, you need to be able to obtain summary data in the following areas:

1. Trade results—Of course, this is one of the more logical benefits of a journal. The ability to track each plan setup independently is also important. Other factors such as time of day, market conditions, and the daily trend are also data points that can add value and improve your trading.

2. Detect plan compliance—Data analytics is ...