When traders analyze their past performance, searching for ways to stop performance leaks or to identify other ways to improve their trading, there are usually a few things that most overlook. Flaws in your performance analysis can quickly lead to wrong assumptions about what you should change and, instead of improving your trading, you are making tweaks that lead you in the wrong direction. Here are a few tips on how to improve your performance analysis and how to utilize your Edgewonk trading journal:
Sample size and recency
Before you start making any changes to your trading approach, you have to understand the importance of sample size thinking. Generally, the more trades you have in your database, the more meaningful the results will be. However, there is a catch to it.
The concept of “recency” says that the most recent trades are more important and meaningful when reviewing your performance. Financial markets are constantly undergoing changes and volatility, momentum and trending and ranging market conditions are always alternating. Thus, when doing a performance review, make sure to use Edgewonk’s date filters and look at the most recent data first. Later on we will show you how to take this even further.
Hindsight analysis vs. consistency
Hindsight analysis is what most traders really do, where they just pull up their charts, take a look at their last 5 trades and then fish for reasons why they might have lost. Often, you’ll even see that such traders try completely new indicators and analysis tools trying to find some random approach that could have kept them out of a losing trade.
Consistence is very important for traders who want to succeed. Following your rules religiously, executing all your trades within your trading methodology’s framework and making consistent decisions allows you to perform a high quality performance review later on. On the other hand, if your trading is all over the place and you are always trying something new, the data you collect from your trading will have very little significance.
Thus, at the beginning of our 12-week trader development program, we urge our participants to stick as close to their rules as humanly possible because the insights they will get will offer invaluable new insights into their trading.
Comparing the incomparable
The problem with self-made journal spreadsheets or other conventional trading journal software is that they usually compare apples and oranges. You can’t just throw all your trading data together and then come up with one single metric for the combined data.
Especially if you are trading different instruments, markets, setups and strategies, it is crucial to separate your trading data as detailed as possible.
Obviously, if you are trading different setups, you want to get individual statistics for all your setups. Different setups are based on different premises and you want to identify individual weaknesses for each strategy and for each parameter of your strategy as well.
Furthermore, individual markets and instruments move very differently from each other and, thus, it’s important to keep track of all markets separately.
And finally, you also want to know in which market environment you are performing best. In our 12-week program, we provide tips on how to track different market conditions so that you can effectively see when your edge is greatest and when you are making your best trades. Typically, our users are very surprised to find out that certain market types are performing much better than others. Afterwards, improving your performance is often, but not always, as simple as trading more in favoring conditions and avoiding unprofitable situations.
Using tags for performance separation
It’s now probably obvious why you should separate your trading performance data as effectively as possible if you want to get the most helpful insights. We created Edgewonk in a way that allows you to personalize your journaling experience in the most efficient way. Here are a few tips on how to improve your data tracking to get better performance results from your trading journal:
Setups
Tracking all your setups individually can already tell you a lot about your trading. Create as many setups as you trade in your Edgewonk trading journal and start tagging all your trades. Then, you can individually work on different aspects of your trading with the help of Edgewonk’s performance metrics.
Quality
Instead of only looking at the outcome of your trades, grade your trades by the quality of the signal. Usually, you would grade your trade based on how well you have executed it and whether or not all your entry criteria were met.
Market conditions
We suggest setting up a Custom Statistic that allows you to track the volatility state or trending vs. ranging market environment. Here it is not necessary to get too lost in the details, but you want to be able to understand which market conditions favor your approach and when to avoid trades.
Downtrend vs. uptrend
Our research showed that markets move very differently during uptrends and downtrends. While uptrends are usually more stable, downtrends are more erratic, faster and more volatile. Just setting up a Custom Statistic that differentiates between uptrend and downtrend (based on price position relative to a moving average) can tell you a lot later on in your performance review.
Trade review and performance analysis does not have to be boring; make it an interesting and fun component of your trading. You won’t just find the perfect trading method somewhere on the internet, but with the help of an efficient feedback loop and correct performance analysis, you can build your own successful method step by step.