If you were to commit your time and financial resources into opening a restaurant or buying an Autobarn franchise for example, it’s fair to say that the art of keeping good records would be vitally important to your success as a business owner. Trading is no different.
To navigate this complex world of trading successfully, it’s essential to have a systematic approach to record your trading results.
Keeping accurate records is not just a best practice; it’s a fundamental aspect of improving your trading skills, managing risk, and achieving long-term success. In this article, we’ll explore what you should record, the best way to record your trading results and why it’s so crucial.
So, What Should You Record?
If you haven’t already done so, working your way through our Trading Plan Tune Up would be a great place to start.
You will receive a copy of the exact Trading Plan our students use, aptly named the ‘TRADER’ Plan. In this training packed full of valuable information, Mat Barnes – our Lead Trainer here at Safety in the market, explains why an effective Trading Plan is so important to have in place BEFORE you even take a trade – based on his 20 years plus trading the financial markets.
In this training, he works through all the key components that make up a comprehensive Trading Plan:
T – Trigger
R – Reward to Risk Ratio
A – Assessing the Trade
D – Deliver your Orders
E – Execute your Plan
R – Review your Result
Don’t already have a Trading Plan – or maybe you already have one but yours needs a tune-up? An effective trading plan will prompt you to work through your trades with a systematic approach. To help you on your journey to becoming a trader, we’re going to give you our Trading Plan Tune Up program at no cost – simply click here to request your copy.
As well as working through this systematic approach to your trading in the Trading Plan Tune Up, Mat will explain how to calculate the Reward to Risk Ratio on your trades and show you how many of our students are achieving 10 to 1 return on their trades, if not more. Mat will also show you ways to tighten up your entry into a trade and reduce your overall risk.
We are firm believers at Safety in the Market, that what gets measured, gets improved – so once you’ve recorded all the data in your trading plan you can begin to build an overall picture of your trading results.
A good metric to record as part of your trading results is the Profit to Loss Ratio on your trades.
This is a great way to track the improvement in your skills and trading as you travel along.
Clearly, your aim is to increase the size of your average profit and reduce the size of your average loss.
To calculate your profit to loss ratio, divide your total profit for all trades completed during a specified period of time, by your total losses for all trades completed during this same period of time:
Profit/Loss Ratio = (Total profit $) / (Total loss $)
We suggest this should be updated and recalculated after each trade.
Finally, another important metric we believe you should keep track of is your Percentage of Profitable Trades.
To calculate this, divide the total number of profitable trades completed during a specified period of time, by the total number of trades for that period, and multiply the result by 100:
% of Profitable Trades = Number of Profitable Trades/the Total Number of Trades then x 100.
Again, this is something that you should update after each trade so that you can track your improvement in real time.
Why You Should Keep Trading Records
Good record keeping helps to build strong foundational habits in your trading.
Recording your trades allows you to assess your performance over time. You can identify strengths and weaknesses in your trading strategy, enabling you to make necessary adjustments to improve your profitability.
BUT Why Else Should You Keep Good Trading Records?
- Risk Management: By keeping records, you can track how much risk you are exposed to and ensure that your trades align with your risk tolerance. This can help prevent large, unplanned losses.
- Tax Reporting: Accurate records make tax reporting easier. You need to report your trading gains and losses to tax authorities, and having detailed records can save you time and help you plan prior to the end of the financial year, potentially reducing your tax liability. Nobody likes a surprise huge tax bill. EEEKKK!
- Emotional Control: Recording your trades can help you stay emotionally detached from your trades. When you have a record of your trading decisions, you can review them objectively, which can help you avoid impulsive decisions driven by fear or greed.
Best Practices for Recording Trading Results
- Use a Trading Journal: A trading journal is a hand written or electronic record of all your trades. Here you can record your emotions, thoughts, and observations related to each trade. This can be kept in a separate space but there is also space to record your thoughts and feelings on your TRADER plan which is supplied as part of our Trading Plan Tune Up.
- Software: Many traders like to use spreadsheet software, such as Microsoft Excel or Google Sheets, to maintain their trading records. This allows for easy organisation and analysis of data – others prefer the old fashioned way of pen and paper.
Taking this one step further, there is also specialised trading journal software and platforms available that can automatically record your trades from your brokerage account, making the process more efficient – it doesn’t matter which method you choose, the outcome is the same, but as Nike says ‘Just Do It’
- Keep a Backup: Make sure you have a reliable backup system. It’s crucial to protect your records from loss or corruption, so regularly save copies to the cloud or an external device.
- Regular Updates: Make it a habit to record each trade immediately after execution. Waiting too long to record can lead to inaccuracies and incomplete information.
- Analyse and Learn: Regularly review your trading results and journal to identify patterns and trends in your performance. This can help you make informed decisions to improve your trading strategy. Make a review of your losing trades – analyse why they went wrong. Were there any common mistakes? Did you violate your trading plan or make impulsive decisions?
- Equally important, review your winning trades and try to identify the strategies that have consistently worked for you. What were the common elements in your winning trades? Can you replicate them in future trades?
- Document Personal Insights: In addition to the trade specifics, your journal should include your thoughts and feelings about each trade. This allows you to understand how your emotions influence your decisions and develop strategies to manage them.
- Categorise Your Trades: Group your trades into categories such as winning and losing trades, long and short positions, and different asset classes. This categorisation can help you analyse your strengths and weaknesses, and potentially the suitability of your trading style and strategy to best fit with different asset classes.
Remember that all of this will take time – just be patient and persistent. As David Bowden, the founder of Safety in the Market, says “Trading must be run as a Business” and recording your trading results is a cornerstone of successful trading.
Not only will it enhance your trading skills – but your profits too over the long term – and will increase your chances of long-term success in the dynamic world of trading in financial markets.