Trade Journal Analysis and Post Reviews

Real trading often gets concealed behind good-looking charts and quotes. @markminervini @Qullamaggie or @PradeepBonde would trade the same charts as you in the Indian markets, but their execution and post-trade analysis are what set them apart.

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Here's what I learnt and did:

Why

I was disappointed with my performance in 2020. By sticking to an 8% stop-loss limit, it reduced my starter position size significantly. Additionally, partially selling into strength left me with single-digit positions that hardly impacted my portfolio.

‍What

MAE and MFE are two important ratios in post-analysis that can help optimize your stop-losses and exit strategies. MAE indicates the maximum amount of price movement against you during your trade, while MFE indicates the maximum amount of price movement in your favour during your trade.

For example, if you entered a trade at 100, and the price dropped to 97 before jumping back up to a high of 110, your MAE is 3 and your MFE is 10.

How

I went over all of my trades from 2020 and calculated for MAE and MFE. Then, I marked the points where I got in, set my stop loss, and made my exits on 5 min and daily timeframes.

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Journal Insight

I noticed that more than 85% of the times, if the price dropped below 3% of my buy price, it would hit my 8% stop loss. Even if I had set my stop loss at 3% instead of 8%, my win rate wouldn't have been any different. I realized that I had been taking on unnecessary risk by using a higher stop loss percentage or entering breakouts too late.

Most of my big winners were both risk-free and profitable immediately. This was not because the chart looked better than the others (in fact, it was often my least hopeful trade), but rather because of favourable market forces. However, I couldn't trail with a large position size to have a sizable impact on my portfolio.

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My Improvements on SL

• My average stop loss (SL) ranges between 1% - 2.5%. I use a higher SL (max 4%) depending on the WHY of the trade like IPOs or earnings BO, or for lower priced stocks (<Rs 50).
• Breaking the day's low often triggers even deeper stop losses, as buyers have failed to keep the price up on the range expansion day. This helped me prevent my capital from getting stuck in losing trades. Nearly all of my stop losses occur on the same day.
• My win rate has stayed the same (between 35%-65%) because I'm still taking the same trades, but with more efficiency.
• Reduced trade risk and increased size. ( 2% SL with 0.5% risk = 25% size VS 8% SL with 1% risk = 12.5% size)
• My R-multiples are 4x faster (5R at 10% versus 40%). Even after partially selling at 3-6R, I can trail a larger position. This is a significant advantage in a bearish or choppy market.

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My Improvements on Entry

• I noticed that most breakouts I entered had a tight (NR) or even a negative day before it actually broke out. I started buying earlier, rather than waiting for a swing high or a trendline to break. I began with the previous day's high and have gradually improved to buying opening range highs.
• This also helped me get off the screen and start my office work faster.

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Caveats

• Being mindful of liquidity and slippage is crucial when I'm trading at my size. I don't have more than 500 stocks in my trading universe in India.
• Tightening my stop loss and entering trades faster takes some skill to execute properly. It took me about 3 months (~75 trades) to get comfortable with it, and I still have a lot to improve on. But no matter how you trade, having good execution skills is a must.
• I tend to get whipsawed more and miss an entry when the stock actually starts moving. However, I'm willing to make this sacrifice because it has optimized my RR metrics more with a bigger size, which has been way more profitable for me.

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Takeaways

The journal analysis I did wasn't anything fancy. It was basic first principle thinking, number crunching in Excel, and diving deep into charts. It doesn't depend on the market, it depends on you. But it's a grind, just like trading is supposed to be, in order to find your "flow". This way, you'll come up with insights and actions that are a part of who you are, rather than just taking bookish shortcuts.

You get paid a lot more for being right first, and in trading you often don’t need to wait for consensus. Entering on trend lines, patterns, and indicators require confirmations which increases trade risk because the entry point is further from the move's initiation point and ideal stop location.

Many Fintwits post charts because it is an easy way to gain followers and retweets. However, the true value of charting is not in serving as an accurate predictive tool, but rather in facilitating visual representation to aid in making better-informed decisions. Don't trade solely based on trendline breaks or indicator triggers. Although trading is a game of probabilities, it's important to consider that there are better analysis techniques available that can help identify lower risk, higher probability trades within the same chart setups.

Most importantly, do not pass off my insights as your own. They may or may not work for you.

Take an unbiased deep dive in your journal, analysing it at a granular level with specific details. Forget or challenge every rule or theory that you have learned, and then rebuild them again from scratch. I'm sure that you'll see a significant improvement in your performance. This post only scratches the surface.