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15
Nov

3
Sim

How And Why To Grade Trades If You Want To Trade Succesfully

Not all trades are created equally and there are good and bad trades – but it goes much deeper than this as we will see. The quality of your trades influences trading performance, account growth and volatility and directly impacts a trader’s emotional capital.

However, very few traders have a way of determining the quality of their trades or how to use this information. In this article, we will show you how to use Edgewonk’s features to easily keep track of the quality of your trades and why it’s so important.

We are starting with the two most important reasons why analyzing the quality of your trades is important:

 

1) It allows traders to evaluate their process

We all know that a process-oriented mindset  is important to have and traders should always look at their trades from a perspective of how they have executed their system and followed their plan, rather than just looking at the outcome alone. But very few do it or know how to implement such a routine.

Through grading trades (we will get into the how later) a trader can finally understand his approach to trading and evaluate his overall process. It is through this simple process that he can become aware of his problems and mistakes and overcome his weaknesses.

It’s essential to move away from the results-oriented mindset because it can destroy a trader’s account; not all winning trades are good and not all losers are necessarily bad and believing that will be very dangerous for your trading account.

Result_proces

 

2) A trader’s risk management can be improved

Even though a trader might only trade one system or setup, his trades are still not going to be the same. A high-quality trade with lots of confluence does usually perform better than a trade that barely fit his rules and plan.

The differences will then become visible in his performance, winrate and account volatility; lower quality trades lead to more account volatility and unstable account growth. A trader who can quantify the differences in his trades can use this knowledge to improve his equity growth and reduce account swings. Through grading trades, a trader can take out the guesswork and find out exactly which trades do well, when he should risk less and which trades to avoid completely.

The animated screenshot below shows how the account growth for one setup can differ just by taking slightly different trades. It is obvious how account volatility changes by looking at the swings in the account and how far the graphs are apart from each other (the simulation is based on Edgewonk’s risk simulator).

Sim

 

How to grade your trades

 

1) Process oriented tags

The most effective way to grade trades is by setting up tags for the three categories Entry, Exit and Trade Management in your Edgewonk trading journal (see here how to do it step by step). You can then assign 3 tags to each trade that describe your process and those allow you to find patterns in your trading.

At the same time, the tags also activate the Tiltmeter which is a visual representation of your trading process. A green Tiltmeter shows that you have assigned more positive tags and a red Tiltmeter shows that you have assigned more negative comments and broke your rules.

Here is a short list of tags you can use in your Edgewonk journal; green shaded comments describe a positive action and red shaded comments show a negative trading behavior.

Process-comments

 

We recommend using comments and tags that describe your own personal problems and not get too general. The goal is it to get a deeper understanding of your approach by using personalized comments.

As mentioned before, this activates the Tiltmeter and you can immediately see how the tags you have used sum up. The image below shows a Tiltmeter from an Edgewonk trading journal and it allows traders to review their process in a new way.

BottomUp-Tiltmeter-1

 

2) Custom Statistic for grades

The second way to grade trades in Edgewonk is through setting up a new Custom Statistic that includes different grade levels. There are a few ways how a trader can do that and below you find 2 examples that can serve as inspiration for your own trading.

 

School level grades

Confluence factors/signals

A

5 out of 5

B

4 / 5

C

3 / 5

D

2 / 5

E

1 / 5

F

0 /5

 

Again, use those as an inspiration and evaluate for yourself what would help your process and analysis. Here are a few more examples on how to use the Custom Statistics.

 

Part 2: Data analysis

Once you have tagged and graded your trades, it’s time to analyze your data. In Edgewonk, a trader can choose from a variety of features and tools:

  • We recommend starting out by looking at the equity graph and checking your Tiltmeter (the green bars in the background). Can you see a correlation between negative trades and account loss? What is the comment/action/tag that cost you the most money?
  • Then, move on to the Trade Analytics table where you get a complete breakdown of your performance. Use the different filters to evaluate the impacts on your trading.
  • As shown above, the Risk Simulator in Edgewonk can show you the differences in account volatility and help you adjust your position sizing based on the type and grades of setups.
  • Finally, we recommend setting up a Session (how to set up the Sessions tool) in Edgewonk to capture your thoughts and make personal notes about your approach. Write down what went well, what you are not satisfied with and what cost you the most money. Over time, the sessions provide a good overview of your process and development.

 

Especially new and struggling traders can benefit from such a routine because it helps them to finally understand where their problems are. They will often recognize that it’s not the system that is performing badly but they are the weakest link. Such a revelation can often lead to big mind shifts and allow traders to make a big step forward.

Take a look here for our trader development program where we help you through the process step by step. 

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