When I first started trading one of the lessons that was drummed into me was that it was important to track all my trades. All the usual reasons were given, this is a business and you need to know the win/ loss ratio, the real expectancy of the system, etc. I had no problems with that mindset.
I have tracked and analyzed performances most of my working life from my racing to projects, departments, individuals and businesses. I have always found analysis and tracking performance a great way of finding out what works and what does not work.
But for a time I find that tracking trades in the traditional way was not helping me and actually was hindrance.
I had been trading for 3 years, and during the last year I had found that whilst I was making progress I was still was only just break even. I could not work out why the learning curve was so slow, my analysis of my results was not helping that much, in fact I found going though my trades and analyzing them was pretty depressing and would put me off taking more trades.
What I could not understand was why was my tracking and analysis not really helping me but in fact hindering me, when in my past experience tracking and analysis performance is one of the quickest ways to make progress.
The difference is that in my past, all my tracking and analysis was done on methods that were consistently applied.
So maybe I was tracking the wrong things in my trading. As I was not profitably with a system that was on paper a profitable system (i.e I had a clear set of rules and trade plan and I had backtested the system).
I went thru my trades and labeled each trade I had made errors in.
Questions I asked myself included
Did I take the trade when my system indicated?
Did I enter as per my rules?
Did I place my stoploss as per rules?
Did I place my take profit as rules?
Did exit early and if so was that per rules?
Did I manage my trade as per the rules?
I did not focus on the profit to reward ratio, the expectancy or it was winner or loser or any of the traditional metrics. I just concentrated on whether I followed my rules consistently.
What did I discover? That whilst I thought I was following my rules and overall I basically was, there was many times, when I basically bent or broke certain rules. I broke or bent my rules on 40% of my trades.
Occasionally I would miss trades that did not look right, sometimes I would place the targets too far or too close (not at where my system said I should place them), I would enter early or late.
If I calculated that if I reduced my errors to about 10% of trades that my trading would be profitable. No new indicator, no new system just the reduction of errors would take a break even system to a profitable system.
So what is the point of tracking trades on the traditional parameters when each trade was entered or exited slightly different, I was not tracking a system, I was tracking a system where the rule set was altered each time I entered and exited a trade.
So I started to focus my tracking on the errors. Defining the common errors and then working on solutions to reduce or eliminating these sort of errors.
I discovered that I had grey areas in my plan, where I could interpret my rules in different ways. These where the weak areas in my system and this allowed me to develop rules around these situations.
I am now on version 22 of my trading system, there are no major changes to the original system, it has got simpler and I make a lot of use of “if…then” statements so it is clear what actions I should be taking to ensure that I trade consistently.
I think it was important to note, I was not making any big mistakes in trading, I was not revenge trading, I was managing my risk as per my rules. But I was making a lot of little mistakes and in the end that made a huge difference in my trading profit and loss. I was dying of a thousand paper cuts.
Of course if I had a system that had no edge then nothing I would do would change this to a profitable system.
I believe that success is achieved in trading with a system with an edge plus money management plus mental toughness (psychological side of trading) and the ability to be honest with oneself but all this must be wrapped in a layer of constituency. Without this then I fear that the results will always be mediocre.
If I could go back to when I first started trading, I would give myself the following advice:
If I have a system which is profitable on paper but not profitable live, then I would focus on ensuring that I was consistently applying that system every single day and that includes taking every trade that the system gives me.
I would spend equal or more time on tracking my performance as a trader on applying my system in the market.
I would then use the results of this tracking to give myself goals for the week and month to work towards becoming the best trader that I can be.
If I am applying the rules consistently and it is still not profitable then maybe the system does not have an edge in the live market.
Of course I still make mistakes and sometimes I make the same mistakes more than once
But this framework has allowed me to identify where I am going wrong, where my system or trading plan had weaknesses or grey areas. This has given me clear areas to work on and improve my trading game.
I now have a system that I more confidence in, a trading plan that actually is a lot simpler to follow and understand and surprising a lot less stress as I know what to do in every situation. Please note I did not say stress free.