Module 12: Risk Management and Trading Psychology
Journaling and Review
Chapter 13 of 14 · about 5 minutes
13.1 What the journal revealed
Mint had kept a trading journal for three months, as Hash had suggested back in Module 4. Mint thought the results were mediocre. Then Hash helped sort the trades.
When Mint followed the plan, the trades made money on average. When Mint broke the plan, the trades lost money on average, and those losses cancelled out about a third of what the disciplined trades had earned.
"So my strategy works," said Mint. "I'm the problem."
"That's the most valuable thing a journal can tell you," said Hash. "Most traders never find out, because they never write anything down."
13.2 What to record
Module 4, Chapter 16 introduced a basic journal. Here's a fuller version:
| Field | Example |
|---|---|
| Date and time | 12 March, 14:30 UTC |
| Asset and market | BTC perp |
| Direction | Long |
| Setup type | Pullback to support in uptrend |
| Reasons for entry | Daily support zone, RSI near 45, funding neutral |
| Entry, stop, target | $100,000 / $97,000 / $106,000 |
| Position size and risk | 0.033 BTC, 1% ($100) |
| Leverage and margin mode | 5x, isolated |
| Emotional state before | Calm |
| Followed plan? | Yes |
| Exit and result | Target hit, +2R |
| Fees and funding | $6 |
| Emotional state after | Satisfied |
| Lesson | Waiting for the candle close helped |
For long-term investments, record the thesis, entry, exit plan, and review dates (Module 11, Chapter 13).
13.3 Key performance metrics
After enough trades, at least 30 to 50, calculate:
| Metric | Formula | What it shows |
|---|---|---|
| Win rate | Winning trades ÷ total trades | How often you win |
| Average win (R) | Average profit in units of risk | How big your wins are |
| Average loss (R) | Average loss in units of risk | Whether you're keeping losses at 1R |
| Expectancy | (Win rate × average win) − (loss rate × average loss) | Average result per trade (Module 4, Chapter 16) |
| Profit factor | Total gains ÷ total losses | Above 1 means profitable overall |
| Maximum drawdown | Largest peak-to-low fall | How painful the worst period was (Chapter 6) |
| Rule adherence | Trades following the plan ÷ total trades | Discipline |
Mint's three months:
| Value | |
|---|---|
| Total trades | 40 |
| Wins | 17 (42.5%) |
| Losses | 23 |
| Average win | 2.1R |
| Average loss | 1.0R |
| Total gains | 17 × 2.1 = 35.7R |
| Total losses | 23 × 1.0 = 23R |
| Expectancy | (35.7 − 23) ÷ 40 ≈ +0.32R per trade |
| Profit factor | 35.7 ÷ 23 ≈ 1.55 |
Positive expectancy. But the breakdown told a different story.
13.4 Breaking results down
The real value of a journal comes from comparing groups of trades.
By rule adherence:
| Trades | Total result | Expectancy | |
|---|---|---|---|
| Followed the plan | 30 | +18.7R | ~+0.62R |
| Broke the plan | 10 | −6.0R | −0.60R |
| All trades | 40 | +12.7R | ~+0.32R |
Mint's planned trades were strongly profitable. The ten unplanned trades cost six units of risk, about a third of everything the good trades earned.
By setup:
| Setup | Trades | Expectancy |
|---|---|---|
| Pullback to support in uptrend | 18 | +0.8R |
| Breakout above resistance | 12 | +0.2R |
| Counter-trend reversal | 10 | −0.41R |
"So I should do more pullbacks and stop trying to catch reversals," said Mint.
"Your own data says so," said Hash. "That's worth more than any opinion online."
Other useful breakdowns include by time of day, by asset, by emotional state before the trade, and by market condition (trending versus ranging, Module 4, Chapter 6).
13.5 The review routine
| Frequency | Review |
|---|---|
| After each trade | Fill in the journal entry while it's fresh |
| Weekly | Did I follow my rules? Any emotional patterns? |
| Monthly | Calculate metrics; compare setups; compare with holding BTC (Module 11, Chapter 12) |
| Quarterly | Review strategy, risk limits, and theses; decide what to change |
Monthly review questions:
- What was my expectancy, and is it positive?
- What share of trades followed my plan?
- Which setups worked, and which didn't?
- What were my biggest mistakes, and what caused them?
- Did my emotions affect any decisions?
- Did I beat simply holding BTC, after costs?
- What one change will I make next month?
13.6 Honesty is the hard part
A journal only works if it's honest. It's tempting to skip entries for embarrassing trades, or to rewrite the reasons for a trade after seeing the result (hindsight bias, Chapter 8). Recording reasons before entering prevents this.
"The trades I least wanted to write down were the ones I most needed to," said Mint.
13.7 Try it yourself
Set up a journal using the fields in section 13.2, in a spreadsheet or notebook. If you have past trades, enter as many as you can remember honestly. Calculate your win rate, average win and loss in R, expectancy, and profit factor. Then split the results by whether you followed your plan.
Key takeaways from this chapter
- A journal reveals whether your strategy works, and whether you're following it.
- Record setup, reasons, entry, stop, target, size, leverage, emotions, plan adherence, results, costs, and lessons.
- Key metrics include win rate, average win and loss in R, expectancy, profit factor, maximum drawdown, and rule adherence.
- Breaking results down by rule adherence and setup often reveals what to keep and what to stop.
- Review weekly, monthly, and quarterly, including comparing results with holding BTC.
- Honesty, especially recording reasons before each trade, is what makes a journal valuable.