TRADING TOOLS

Trading Journal | Trading Tools

The trading platforms provided by the brokers offer a number trading tools, functions and features to aid your trading in the financial markets.

Their main aim and focus is to get you into a trade.

There is a trading log available that records your trades. However, it merely reports your entry and exit points. It’s a transaction log and gives no insight into why you initiated a trade. More importantly, there is no insight into the factors that influenced the performance of your trade and the resulting financial outcome.

When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates. (Karl Pearson)

The benefits of recording and reporting the factors that influence performance is clear in any highly competitive and goal-oriented profession.

Highly successful athletes improve by watching replays of their competitions. They record their diet, their physical health and a raft of additional performance data.

It underpins their continued development and is a significant contributor to their success.

Highly successful traders, unsurprisingly, adopt the same approach.

The Number One Trading Tools

An effective Trading Journal helps you to track your trading performance. It highlights your successful trading strategies and can help to identify areas for improvement.

Crucially, it also needs to provide a record of your emotions.

A trading journal should provide the opportunity to develop your psychology in tandem with the improvements you identify to your trading strategy.

Being aware of your emotions before, during and after a trade will help you identify where they may be harming your trading performance (see in the Kihon phase).

Knowing yourself and knowing your numbers will move you closer to being a highly successful trader.

Your Journal will help you stick to your trading plan and stop you hopping from one strategy to another. It will help promote the use of sound risk management and ensure you only take the best trading opportunities.

An effective Journal will build confidence in your ability, instil a positive mindset and build trust in your trading plan.

Your Journal will become your mentor.

A journal helps to shape your goals.

It helps to narrow your focus by highlighting markets that, due to external factors, may not offer the same opportunities. Prompting you, for example, to focus more on indices and invest less time in the stock market or currencies.

Your risk management strategy is brought into sharp focus with an effective Journal.

The Journal can help to identify where potential rewards are restricted by stop loss placement or position sizing.

The opposite may also be true, helping you to identify where stop loss placement or position size may be contributing to losses.

A Trading Journal can be a physical pen and paper journal or a digital journal. Our preference is for a digital Journal.

A quick Google search will highlight numerous excel spreadsheets available to download, and many of them are free.

We use the Journal provided by Forex Smart Tools. The added functionality over a basic spreadsheet coupled with the fact that traders created it for traders was the determining factor in our choice.

Whatever the format they all have one common factor. Discipline.

Maintaining a Journal requires discipline.

If you are serious about improving your trading, then you need to model the highly successful traders. Use the same techniques that highly successful traders use to improve.

Highly successful traders are disciplined, and they continuously analyse their trading performance and identify where they can improve.

Without question, the number one tool that they use to facilitate improvement is the Trading Journal.

You can do that too.

Back-Testing | Trading Tools

Experts in cognitive psychology agree that experts, whether it be business or sport, find it difficult to teach their expertise.

Experts know what to do because their expert behaviour is without conscious thought.

They don’t spend time thinking about what to do. They just do it.

As novice traders, we spent a significant amount of our time in trading orientation.

Thinking about possible trade setups and learning the trading system. Trying to understand the system rules.

Experts focus on how they interpret information – a very different approach.

Highly successful traders put effort into becoming an expert. They earn their pips through practice.

Through practice, they gain confidence in knowing when to place a trade and how likely they are to be successful.

Our goal was to get from a novice trader to expert trader in the shortest possible time.

The fastest way to achieve expertise is to gain experience in trading the system.

The fastest way to gain experience, and ultimately expertise, in trading the system… is back-testing.

Move Closer To Expertise

Many charting packages make it easy to back-test and offer the function as part of the trading tools.

They provide historical price data which allows you to scroll back in time and record trades that you would have taken if you had been trading the chart in live market conditions.

Manual back-testing can be tedious. However, the payback is considerable.

It allows you the opportunity to gain experience in trading the system through different market conditions.

Each trade during back-testing moves you closer to expertise.

We use Forex Tester, a manual back-testing software, which allows us to import data, record the trades we would have taken and export the trading data into a spreadsheet for analysis.

Exporting and analysing the data allows us to validate trading systems, find behavioural patterns, and develop strategies.

That said, manual back-testing does have some challenges.

Data quality can vary from broker to broker depending on where you download it.

Indicators can change in the way that they operate from platform to platform.

Spread is also a factor that you have in the live market.

When you open a position, or you place an order, there will be times that your broker fills that order above or below the actual price that you requested.

It’s not very much; usually 1 to 2 pips but at certain times it can be quite large. That’s the spread and something to consider as it’s hard to model when you’re back-testing.

Slippage is also a factor that is hard to model.

If you have either a stop loss or profit target set and the price changes very rapidly, it may bypass one of those two targets. You could end up either making more money or losing more money than you anticipated.

It’s also important to note that back-testing is part of a process.

Markets Change All The Time

You can’t just focus on back-testing and hope that that’s just going to give you some fantastic trading strategy going forward because it doesn’t work like that.

Markets change all the time and also what happens when you employ a trading strategy in the live market can be very different from what happens in a back-test.

That said, in our experience, the challenges of back-testing are offset by the benefits.

We typically back-test a year’s data, every three months, to test our trading approach. We then forward test for three months on a demo account and then back-test that same data.

As long as the entries and exits are pretty close and the profitability is broadly in line, we continue to trade our approach on a live account with confidence.

By far, the most significant benefit of back-testing is that it allows you to train your mind, your brain, to see the patterns.

It allows you to train your mind, to train your brain, to see the patterns as they happen, which is hugely important because it’s easy to see the pattern once it’s already there.

It would be best if you saw the pattern as it’s actually developing, as it’s actually happening.

If you can’t see it when it’s actually happening, then it doesn’t have value because you’re not going to be able to trade it and you’re never going to catch it.

Our Trading Indicators | Trading Tools

We considered carefully the pros and cons of outlining the indicators that we use when trading.

Your trading system needs to fit with your view of the market. That will influence the indicators that you use.

Trading indicators form a significant part of the trading materials offered to technical traders.

We implemented many of the indicators available and, in our experience, the majority didn’t fit with our trading style.

Most indicators signal an entry point; however, they are inherently slow and often lag the market.

We use indicators that signal that the Market Makers Model is “in play”. More often, that is not our entry point.

We use:

• Ichimoku Kinko Hyo (settings reviewed every three months)
• Time Segmented Volume

Price crossing through the Kijun Sen, coupled with (the source of) the volume reported by the Time Segmented Volume, prompts us to take an interest in the market.

A signal that it’s time to identify where price action is on the Market Maker Cycle.