One routine that has helped me in my trading career is to keep a record of all of my trades. I use a number of tools to accomplish this, but two that I use most often are Tradervue and Google Sheets. In this post, I’m going to focus on how I use Google Sheets to:
- Grade each trade that I take.
- Grade my overall performance for each day that I actively trade.
I started grading these particular areas of my trading because I wasn’t satisfied with the notion that a day’s Profit and Loss was an accurate reflection of how well I traded for the day. Since perfectly following your methodology can still yield trading losses, and since the most important goal of a successful trader is to trade well, why only measure performance by Profit and Loss when you have no control over the outcome of any given trade?
Don’t get me wrong – Profit and Loss, on a longer timeframe (weekly, monthly, quarterly, annually), is important. Without a positive annual P&L (especially over the course of a few years), trading for a living sans profits would be quite the oxymoron. However, on a per trade and per day basis, P&L should not matter as much as how well you are sticking to your methodology. Since, again, you can’t control the outcome of a trade, it’s imperative that you focus on all of the elements of trading that you can control by taking only high quality, successful trades.
For me, a successful trade is one that adheres to all of the criteria defined in my methodology (i.e. my business plan). I would much rather take a successful trade (one that tracks closely to my methodology) that results in a loss than an unsuccessful trade (one that deviates from my methodology) that results in a win. Why is that? Assuming that your methodology has demonstrated a positive expectancy, following your methodology will yield profitability over time. However, deviating from your methodology and trading without sound entry and exit criteria, carefully calculated risk and trade management parameters, a thoughtful position sizing system, and a favorable reward/risk profile will lower the odds of longer term profitability. This is why a losing trade that adheres to your methodology is to be looked upon in a positive light – it’s merely a single stepping stone of a path towards profitability.
Though each methodology typically has its own unique attributes, trading methodologies generally share common components that are essential to long term profitability.
As mentioned, entry and exit criteria, risk and trade management parameters, a position sizing system, and a favorable reward/risk profile are foundational components of most (if not all) trading systems. In addition, I incorporate the following into my grading scale for trades:
- Trade Plan: Does this trade follow the day’s Trade Plan?
- Intuition: Did I trust or ignore my intuition?
- Intuition is something that some develop over the course of their trading career. It is not necessarily recommended to include intuition as part of your grading scale, especially if you’re new to trading.
- Emotion/Impatience: Did negative emotion or impatience play a role in this trade?
- Emotion, when used correctly, is an important part of trading as it can provide important feedback about internal and external factors associated with a trade. Many preach that emotions should be eliminated from trading, but that is both unnatural and disadvantageous.
- The key is to differentiate between positive and negative emotion (positive: emotion that reflects external danger (e.g. the market showing signs that it is going to fail to breakout while you’re in a long trade) vs negative: emotion that reflects internal danger (e.g. being afraid to stay in a trade because you don’t want to give back your profits even though the market is not giving you a signal to exit).
- I have a few other components from my methodology that I use in my grading scale for trades; however, I won’t list them here as they are unique to my trading methodology and won’t make much sense to others.
For the aforementioned components of my methodology, I assign each a number (weight) based on their importance (per my methodology). For example, following my Trade Plan is a critical part of my methodology and I do not want to take trades that deviate from my Trade Plan. Thus, I weight the Trade Plan component of my grading scale with 10 points. If a trade follows my Trade Plan, then I assign it 10 points in the Trade Plan column of the trade’s row. However, if a trade deviates from my Trade Plan, then I assign it 0 points. Since it is weighted more heavily than all but one other component, if I take a trade that deviates from my Trade Plan, the best grade that I can get for the trade is a “C”. This forces me to make an extra effort to only take trades that align with my Trade Plan.
Aside from Intuition (also weighted with 10 points), the remaining components of my grading scale for trades are weighted with 5 points each. Since all components of my grading scale for trades are important, if just one of the 5 point components is missed (e.g. if I fail to enter a trade with a realistic profit target of at least 2R (2x the trade’s risk), then the best grade that I can get for the trade is a “B”. Since my objective is to shoot for “A” grades, this forces me to make an effort to follow the many aspects of my methodology for any given trade. Over time, through repetition, much of this becomes automatic (i.e. I won’t even consider entering a trade without a 2R profit target).
Once I have assigned points to each of the components used in my grading scale for trades, I determine the point ranges for each letter grade. For my current grading scale, I use the following ranges (out of 45 possible points):
- A = 45 – 41 points
- B = 40 – 36 points
- C = 35 – 31 points
- D = 30 – 27 points
- F = 26 and below
Once your point ranges are defined and associated with letters, you now have the ability to objectively grade each trade that you take – based entirely on your methodology! To help give you a better visual of how it all works, here is a screenshot of a grading scale for trades that I use:
Note: There’s no room for subjectivity here. Make sure that you setup your grading scale in a way that eliminates the potential for subjective point assignments. In order for this grading scale to actually mean something, you must do this. Just as there is no subjectivity in a Profit and Loss statement, there can be no subjectivity in your grading scale for trades data.
Integration into Tradervue
The final step in my trade grading process is to add a “Trade Grade” tag to each associated trade in Tradervue, making sure to include the actual grade for each trade (e.g. “Trade Grade: A”). Doing this gives me the ability to leverage the power of the Tradervue website to be able to filter and sort my trades by grade over time so that I can identify trends, commonalities, etc. Highly recommended.
Grading days is very similar to grading trades: Identify important components of your methodology that can be assigned points in an objective manner in order to determine your overall performance for the day. Here are the components that I use to objectively grade myself each day that I trade:
- Trade Plan: Did I follow my Trade Plan for the day?
- Intuition: Did I trust my intuition while trading?
- Only incorporate intuition into your trading if you’ve been able to develop this ability over time.
- Valid Trade Idea: Compromised of custom entry parameters that must be met prior to entering a trade; in addition, having a reward/risk ratio of 2:1 is a necessary part of validating a trade idea.
- Risk Management: When entering a trade, I based my risk off of (and set my stop outside of) a valid, higher probability area.
- Note: Position sizing should also be included here. My methodology is constructed in a way that it makes it impossible for me to not size my position correctly since I always risk 1% of my Initial Account Balance on each trade. However, for you this may be different so make sure that position sizing is included here (or as part of another grading component) since it is a very important part of trading.
- Trade Management: I let all of of my valid trade ideas that were taken as trades play out and did not exit until my profit target was reached (with the exception of seeing valid caution signs in real time, prompting an early exit).
- Missed Trades: I did not hesitate to enter or miss valid trade setups (that I identified or had been waiting for) due to fear, anxiety, or doubt. Trades that I did not plan for or did not notice in real time do not count.
Similar to the grading scale for trades, I then assign points to each component. For this particular example, each component has an equal number of potential points: 5. In addition, I also determine the point ranges for each letter grade. For my current grading scale, I use the following ranges (out of 30 possible points):
- A = 30 – 27 points
- B = 26 – 24 points
- C = 23- 21 points
- D = 20 – 18 points
- F = 17 and below
Once your point ranges are defined and associated with letters, you now have the ability to objectively grade each trading day that you are active in the market – again, based entirely on your methodology! To help give you a better visual of how it all works, here is a screenshot of a grading scale for days that I use:
Note: There’s no room for subjectivity here. Make sure that you setup your grading scale in a way that eliminates the potential for subjective point assignments. In order for this grading scale to actually mean something, you must do this. Just as there is no subjectivity in a Profit and Loss statement, there can be no subjectivity in your grading scale for days data.
Integration into Tradervue
The final step in my day grading process is to add a “Day Grade” tag to each trade associated with the graded day in Tradervue, making sure to include the actual grade for the day (e.g. “Day Grade: A”). Doing this gives me the ability to leverage the power of the Tradervue website to be able to filter and sort my trades by day grade over time so that I can identify trends, commonalities, etc. Highly recommended.
Questions or Comments?
If you have any questions or comments about this post, then feel free to send me a Mention or Direct Message on Twitter @BreakingOutBad.
For the time being, I am not going to share these Google Sheets since people have different methodologies and consequently, different components with different weightings by which to construct their unique trade and day grading scales. The Objective Trade and Day Grading Tool is now available for download.