An important component of your trade plan is diagnostics. This is the feedback loop from your performance. By monitoring performance on a regular basis, you can determine if you are staying well within the parameters of your plan, or straying off to the side of the road. Remember, leverage is high in FOREX. Small mistakes are magnified — quickly. A rut can turn into a ditch into a cliff in minutes. Perhaps even more importantly, by doing reviews, you can get a big picture of things and identify elements and areas you can tweak for greater success.
In mentoring students I have found two interesting phenomena, both quite common:
- New traders tend to make too much of each trade.
That is, they attempt to draw universal conclusions from one loss or one win. “This S/L always loses!” Or, “This formation is the best of all!” The human mind wants to generalize; it wants rules and certainty. But, alas, a sample of 1 or 10 or even 50 is often not enough to do the job properly.
Tip: Make small evolutionary changes, not large revolutionary ones. Respect the market process and your plan for it. Think tweak. Do not take a hatchet to your trading method if you have not at least attempted surgery with a scalpel first. This brings up the second phenomenon. Processes do not like invasive activity.
- New traders generally fail to realize that small changes to a trading plan can, indeed, make large changes to the bottom line. I mentioned earlier that many traders find the difference between winning and losing to be right between three winners per 10 and four winners per 10. What if you could find a tweak that would turn 1 loser out of 10 into a winner? Or, if you could find a jiggle that turns 1 small winner in 10 to a large winner? In the Goodman Method, this might be simply letting an over go TTL.
Consider this series of 10 trades.
This is from one of my students’ trade campaigns. It is a losing series. She has three winners and seven losers. Except for trade seven, the profit-loss ratio was very good. Clearly, trade seven was the difference. When she went back and compared the tracking log, continuation chart, and campaign worksheet, the problem and the solution were easy. On trade seven she lowered her stop not once but twice. She was sure this was a good setup and did not want to miss it. Instead of losing 50 pips, she lost 165 pips. That was all it took to change the bottom line on the series of trades.
Tip: I recommend doing a very quick review after every trade or at least after every session, if it included a closed trade. A mark on your continuation chart or a one-line note in your diary is all you need if you see something you want to study later about the trade.
Do a diagnostic every 10 trades. Do another one every 30 trades and dig even deeper. A day trader may divide his 30-trade campaign into three smaller sub-campaigns along the lines of Table below.
Sometimes, it is not so simple. But a little objective Sherlock Holmes work can be very effective! Here are some of the clues you may consider when doing a diagnostic.
- Winners-LosersIs the ratio of winners to losers consistent with the profit to loss? Are the golden ratios working for you or against you?
- Profit-LossIs the ratio of profit to loss consistent with the winners to losers?
- Market EnvironmentsMarket environment (ME) is Mr. Goodman’s other theory. It is discussed in more detail in Tools for Traders. ME defines a market in terms of directional movement (net change from A to B) and volatility (aggregate change from A to B). All markets are somewhere on a continuum from low DM and low V to high DM and high V. I have found most traders have a sweet spot in which they do their best trades and a sour spot in which they do their worst trades.
- PairsCurrency gpairs seem to have personalities. Perhaps I have been at this game too long and need to call for the men in the white coats, but I can spot an AUD/NZD chart right away! Even if you cannot spot pairs, it may show in your diagnostics that you do well in some, and poorly in others. But this is a good example of where you do need a meaningful sample to draw conclusions. Please do not take a loser in the GBP/JPY and say, “I will never trade it again!”
- Session TimesThere are two possible ways to analyze this diagnostic. If you trade at different times of the day, do some times work better or worse with respect to performance than other times? Markets trade from the Asian session to the European session to the North American session. Do you do better or worse in one of them? Is there any overlap in the two sessions in which you do exceptionally well, or poorly? Again, be sure to build a solid sample before working this idea.
Tip: Charlie used to say, “Why bang your head against the wall if there is a doorway through to the next room two feet away?” He meant this with respect to trying to find meaning in a bad chart when there were so many other opportunities at hand. It could very well apply here. If something works or does not work — for whatever reason — make the adjustment, and go with the flow.
- Long or ShortGood traders show little or no bias between going long or short. They are just lines on a chart and direction should not be meaningful in that regard. But if you have a bias, make the adjustment. The idea is to make money, not to be mathematically elegant or philosophically pure.
- EntryKeep a chart library of your entries. You can accomplish this by using SnagIt and saving your continuation charts once a trade is complete. Analyze your daggers or whatever entry tool you use. Can you find a difference between those for good trades and bad trades?
- Stop-LossIn Goodman, there are three potential S/L areas. Once you have a chart library, you can compare S/Ls to PTS templates and see which — for you — go best together.
- Take ProfitIn Goodman, the big decision is at the over. Take it or trade the line? Go back to all your overs. Which ones would you have been better staying to TTL? Why? Make the adjustment.
- BiofeedbackCompare your 30-trade campaign worksheet to your biofeedback. Do you do better in certain biofeedback zones? Worse in others?
There are many other factors to consider. I am sure you have already thought of others. The goal is to find those hidden areas where you can make a small adjustment to your plan, and a big adjustment to your bottom line.