Some people wonder why we don't focus on dollar amounts, like most other trading journals.
In this post, I'll give you a quick explanation of why we chose to do this and how it can help you become a high-performance trader.
Accounting-Based vs. Performance-Based Trading Journals
There are basically two types of trading journals:
- Accounting-Based: Focused on recording every metric possible, including dollar (or your local currency) returns, pips and Sharpe ratio.
- Performance-Based: Focused on streamlined performance metrics like risk adjusted returns (risk multiples or P-Ratio), winning percentage, system tracking and trade exit optimization.
Yes, a journal can be both.
But most trading journals are accounting-based journals and they give traders way too much information.
In the end, we found that most traders end up creating their own journaling process by combining tools like: Excel, Evernote, Trello or Microsoft Word. I was personally using Evernote with MyFxBook.
Accounting Metrics That Don't Matter
Let's take a quick look at the top two metrics in accounting-based journals and why they don't help you improve your trading performance.
Dollar (Currency) Amounts
Sure, if you work for a fund and you need to calculate your bonus at the end of the month, then you need to know how much you made that month.
But you can also calculate that by subtracting your starting monthly balance from your ending balance.
Tracking dollar profit/loss per trade just distracts you from the metrics that really matter.
For example, let's say that you made $12,055 on a trade.
If you were just tracking dollar amounts, that might look like a fantastic trade. But what if you risked $55,000 to make $12,055?
Then that trade looks much less impressive. It probably won't take you too long to blow out your account with that reward/risk ratio.
Dollar profit/loss per trade doesn't matter when you are working on optimizing your trading performance.
Pips or Dollars Per Share
I always cringe when I see a trading journal tool track cumulative pips or dollars per share/contract. If a tool tracks pips, I'm very sure that the creators don't actually trade, or they don't understand trading performance optimization.
Pips or dollars per share/contract don't matter.
For example, let's say that you have these two trades in your account:
- 10 pips win (10 full lots) = $100 profit
- 5 pips loss (100 full lots) = $5,000 loss
If you only tracked pips on these two trades, you would show a net 5 pip gain. But in terms of profit/loss, you would have lost $4,900.
That's a huge difference.
So ultimately, tracking your pips tells you nothing about your performance.
Performance Journal Metrics That Do Matter
Now we move on to performance-based trading journal metrics. Here are the stats that we have included in RazorJournal and should be in any performance trading journal.
Percent of Stop Loss
This is the most useful trading metric, that most trading journals are missing. We use our Percent of Stop Loss or P-Ratio metric to measure the return on your trade, relative to your stop loss. Some people also call this a risk multiple.
Percent Risk Per Trade
The amount of your total account that you risk per trade is a key metric in understanding how to improve your trading performance. Some accounting journals don't provide this information.
MaxP
MaxP is one of our proprietary metrics and it shows you how far price goes after you close out your trade, if you didn't move your stop loss. This metric can give you vital clues as to if you should hold on to your trades longer.
Synchronization Can be a Problem
Since I trade Forex, I use MyFxBook to track my trades. I think most Forex traders do.
It's easy to setup, your accounts get tracked automatically and it gives you some useful information. However, it's not a performance-based trading journal.
MyFxBook is an accounting-based journal.
One of the big downsides of an accounting journal is that you have to keep the dollar amounts synchronized between your broker account and your trading journal.
So if a broker changes their backend trading system, like Oanda did recently, you will have to create a new account in MyFxBook.
Same thing if you change brokers, or trade with multiple brokers at the same time.
Whenever you setup a new account in an accounting-based journal, it's cumbersome to get performance stats across all accounts. Many times you will have to flip back and forth between they accounts to get certain information.
On top of that, it can be easy to accidently erase the data from one of your accounts. In the case of the Oanda change, since the old account was no longer accessible, all of my trading data from that account was lost.
That's why many traders choose to track their trades in Excel or other similar tools.
They just need to see all of their performance metrics in one place and they don't want to worry about losing the data.
Final Thoughts
The bottom line is this…
Do you want to know the exact balance of all of your accounts (accounting journal), or do you want metrics that will help you improve your trading (performance journal)?
That's the difference between these two types of trading journals.
If you want a performance trading journal and care more about improving your trading results, learn what RazorJournal can do for you here.