Let's face it…
If you are trading a manual trading strategy, you will miss some trades. That's just how the game works.
However, what if those missed trades also contained some valuable information that could help you make more money?
A treasure chest, hiding in plain sight, if you will.
Well, then I'd say that it's probably a good idea to pay attention to them.
Journaling my missed trades is an exercise that I have found helpful when learning a trading strategy, so I wanted to share it with you.
Keep in mind that once you have mastered a trading strategy, you probably won't need this exercise anymore.
But I have found that it's a great way to speed up the process of learning and optimizing a trading strategy.
It is meant to be used alongside your current trading journal. If you don't have a trading journal, see my current favorite journals here.
In this post, I'll give you the video guide on exactly how journal your missed trades and give you the top 5 ways that journaling your missed trades can improve your trading.
You might be thinking that his exercise is a waste of time and I totally understand why you might feel that way.
I would have said the same thing a few years ago.
All that I ask is that you keep an open mind and this post might just change your mind. I'll also talk about why hindsight bias doesn't matter, if you are doing this exercise correctly.
Before I dive into the guide, let's take a look at the top 5 ways that a missed trades journal can improve your trading.
1. Figure Out How to Stop Missing Trades
This is the big one.
If you are missing out on profitable trades that fit your trading plan, then you need to figure out why.
Your trading career depends on it.
Yes, there might not be any way to take those trades.
But then again, there might be. So you owe it to yourself to explore if it's possible.
Here are some ways that you can reduce the number of high quality setups you miss:
- Create alerts on your trading platform to signal you of a possible trade entry. If you don't know how to do this, find a programmer to help you.
- Maybe you need to be trading at different times. Your best setups may be occurring during the New York session, when you are currently trading the London session.
- Use automation to take the trades for you. Remember, you don't have to go fully automated. You can use Incremental Automation to automate parts of the process. To find a programmer to help you with this, see our directory.
2. Practice Your Setups
Learning to trade well is all about practice.
That's why backtesting is so effective. You get in a ton of reps, without having to wait for the live markets.
Keeping track of your missed trades is yet another opportunity to practice your trading strategy.
If you want to get all the practice possible, journaling missed trades is a great way to do that.
3. Discover New Optimizations
When you log your missed trades, you grow your library of reference material on a particular trading strategy, for you to go back and review later. This has several potential benefits when optimizing your strategy.
Here are a few questions that you can possibly answer with your library of trade setups:
- How long does it typically take for price to move into profit after I take a trade? Understanding this can help you cut a losing trade sooner.
- How much profit do I leave on the table? Find out if you are missing out on a ton of profit after you close your trades and work on a way to take advantage of these moves. You might consider extending your profit target, using a stop trailing method, or using an 80/20 split exit.
- Does price frequently retrace after I typically take a trade, possibly giving me a better entry? I believe that fine-tuning your entry is more important than having a good exit. If you can tighten up your stop loss, that's the easiest way to increase your R-multiple.
- What do my losing trades have in common? When you journal missed trades, you also need to journal losing missed trades. This can help you spot patterns in your losing trades and correct them.
- Are there certain times of the day that are better for taking trades? Do you lose more during the Asian session than in the London session? Well, then that's a really easy fix.
- And more! What other questions could you ask about your trading strategy to improve the returns?
If you want to create an even larger library, consider creating Flash Cards of your backtesting trades.
4. You Might be a Much Better Trader Than You Think
Getting down on yourself for losing trades is one of the deadliest things that can happen to your trading account balance. This can lead to overtrading, mismanagement of trades, quitting and a Pandora's Box of not-so-fun ways to lose money.
So learn to forgive yourself.
It's your secret weapon.
Aside from that, journaling missed trades can boost your confidence by showing you that you might be just one or two tweaks away from consistently profitable trading.
For example, let's say that you lost 2% last week.
But when you go back to your missed trades, you find that you missed 3 winning trades that you would have taken for sure.
This would have made you 3% profitable on the week.
Now you can go back and figure out why you missed those trades and possibly figure out how to prevent yourself from missing more trades in the future. Even if you find that it was impossible to take those trades (because you were sleeping, on vacation, etc.), reviewing your missed trades can give you the confidence that you are on the right track.
You might just need to keep taking trades and letting your edge work for you.
5. Find Out if You are Getting Lucky
In all fairness, you might also be a worse trader than you are currently getting credit for.
You could be benefiting from the luck of the draw over the short term, and could be headed for a big drawdown later.
Journaling your missed trades can help you identify if you have been lucky, or if you really do have a legit trading strategy.
If your live or beta trading results are profitable, but you find that your missed trades would have led to a lot of losses, then ask yourself why that is. There might be a perfectly good reason why you are skipping these losing trades.
But if you cannot find a good reason, then your trading strategy that could be a ticking time bomb that is waiting to take a big chunk of your trading account with it.
Best to find that out before it happens.
What About Hindsight Bias?
The first objection that usually comes up when it comes to missed trade journaling is that hindsight bias will cloud your judgement. Therefore you would not be able to make objective calls on which trades you would have taken and which ones you would have passed on.
Yup, that's a fair statement and there isn't a way to completely counteract hindsight bias because you already know what happened. However, try to remain as objective as possible and use these two techniques to shield yourself from hindsight bias when journaling missed trades.
Before you tag a trade as a missed trade, scroll your chart back to the point of the setup. When you hide the information after the setup, you are now at the “hard right edge” or the point where you need to make a trading decision.
Go or no go?
If the setup doesn't look so good at that point, then you probably wouldn't have taken the trade.
Have a Specific Trading Plan
But what if you still have difficulty deciding if you should take the trade or not, even when you scroll your chart back?
Then your issue is probably that your trading plan isn't specific enough. Go back to your plan and see if you can make your entry more specific, so there is no doubt if you should take a trade or not.
Yes, that's not always possible, especially with highly discretionary strategies. But give it your best shot, it could be the step that takes your trading to the next level.
How to Journal Missed Trades
Make this process as easy and pain free as possible.
This is yet another thing that you will have to do each week, so make it simple and dare I say it…even fun. This video will show you exactly how to get started.
I use Evernote, but feel free to use what works best for you.
So that is why it's helpful to journal your missed trades and the simplest way that I have found to do it.
Does this sound like too much work?
Well, I hate to break it to you, but learning to trade well is just like any other profession. You have to put in the work to get the results. Just ask any successful trader.
Now get to work 🙂