“A trading journal keeps you constructive, keeps you learning, and keeps you working on the things that are most important. It is not a tool for simply rehashing the day; it is a tool for self-development.” - Brett Steenbarger, Ph.D.
This article stems from a recurring issue that seems to appear when traders start to pay attention to their statistics. There comes a time when a trader is becoming consistent to a certain extent and starts to shift his objective from "making money" to "making good risk-adjusted returns". At this point, many traders start to put pressure on themselves, seeking to reach certain performance objectives (for example an Average Win/Average Loss ratio of 2) in isolation.
The net result is, usually, poor performance and a dose of frustration to top it all off.
So let's cut through these issues.
What Came First: The Trading Process or The Statistics?
Yes, it's important to track your statistics.
Yes, it's important to produce good risk-adjusted returns.
But your statistics are a function of your entire trading process, which is a sum of good habits. Just like your annual blood analysis tells you how functional your day to day living habits are, your trading statistics tell you how functional your day to day trading habits are.
The focus must always be on the PROCESS. The PROCESS creates the statistics, not the other way around. Here's a good example that explains some of the mental traps that will appear if you start to lean on our trade statistics instead of your process.
One trader I worked with had this issue: I’m worried about the pace of my progress. It has been much slower than expected. How can I speed up the process going from say 2 trades/ week to 20 trades/week without completely deviating from the system I've built?
This trader had recently reached consistency and his equity curve was moving upwards. But he was only getting 2 opportunities per week, on average. The trader wants to take more trades, because he knows that a higher trade frequency means potentially more frequent profits.
It goes back to expectancy formula:
(Average profit per winning trade)* (% winning trades) – (Average loss per losing trade)*(% losing trades)
Here’s a realistic expectancy calculation:
($300 x 50%) – ($150 x 50%) = $150 – $75= $75
Breaking it down:
50% Win Rate
Avg Profit/Avg Loss = 2
The expectancy formula above indicates you had 50% winning trades and each gained $300 on average, with 50% of total trades being losers but at a cost of $150 each on average. Your expectancy for the next trade is a net $75. The expectancy is positive, but we also need to take into consideration how much capital we’re using, and over how many trades we can obtain that result.
If you are trading only once per month, in one year you might have a high probability of making 12 x $75= $1170, which is a great return on a $5000 account, a decent return on a $10000 account, but it still may not fit your goals. Here's the equation you want:
Capital Goal = Starting Capital + (Expectancy * Total Number of Trades)
Let’s say you have $10,000 worth of risk capital and you want to make a healthy 25% return this year. Here’s how you rework the equation:
$12500 (goal) = 10000 (starting capital) + [$75 (expectancy)*number of trades]
You would have to make 33 trades per year in order to reach your goal, which is almost triple what you are actually achieving (12/yr in the example). And this is what was worrying the coachee: he felt tha