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In this article, we will see how analyzing our trade logs can give us insights into improving our trading.
That is the first step if you don’t have trade logs.
It doesn’t have to be fancy.
Just write down the P&L of each trade for each strategy.
For example, here is a hypothetical trade log for one particular strategy listing the wins and gains of the last 40 trades:
P&L in a spreadsheet like this…
If the trader did not keep a log, then in the trader’s mind, he may think that this strategy is doing well.
After all, from his recollection, he is winning trades more than he is losing.
And he would be correct.
There are 26 wins and 14 losses.
However, if you sum up the P&Ls (profit and losses), it comes to a net total of -$37.
This strategy, or the way the trader is trading this strategy, is not profitable.
At best, you can argue that it is a break-even strategy.
If there were no logs, this would not be known, and the trader would continue trading it and wondering why the account size had not grown after a year.
Some may say that the account size has not grown because the trade sizes are too small. Well, that may be true.
But suppose this log was from a trader with a $10,000 account.
Or maybe a trader from a $25,000 account adopted the 2% rule, where no trade should lose more than 2% of the portfolio value.
Therefore, these are trades with a max loss of $500. Because 2% of $25,000 is $500.
And it does look like trade number 26 took a max loss of -$500.
Cut Out The Big Losses
When we chart out the P&L in a spreadsheet like this…
Then we notice something more interesting.
We see that none of the wins exceed $200. And there were a few losses that nearly doubled that amount.
We see about four losses in the -$400 range.
Could the performance be improved if we cap our losses at -$200?
Let’s say the trader was to exit the trade when she lost $200.
Then trades number 8, 13, 36, and 40 would be around -$200 P&L.
This is what it would look like:
And the net P&L would be a positive $816.
By capping our losses, it was able to turn a losing strategy into a winning strategy – possibly.
Depending on the strategy, there is a small chance that capping the losses might reduce the number of wins.
And whether that would affect net P&L requires further investigation.
The principle is this:
In trading, there are often big wins, small wins, big losses, and small losses.
If we eliminate all the big losses, we are left with only big, small, and small wins.
Usually, with a decent strategy, the wins would outpace the losses.
Let The Winners Run
We noticed another thing with the logs.
There are no big winners.
Depending on the particulars of the strategy, this may be fine.
However, would it be possible to let the winners run longer?
There may be an issue with the trader taking profit too soon and not letting the big winners manifest.
These are just some of the insights gained by examining the logs.
Conclusion
The first step is to log the P&L of every trade.
Then, learning how to use a spreadsheet to visualize those results is great.
Could it be revealing something to us on how to improve our trading?
Are we taking too many large losses?
Are we cutting our winning trades short?
These are the questions that we want answers to.
And having trade logs is the first step in getting there.
We hope you enjoyed this article on analyzing trade logs.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
Nice one