11 Key Variables for Successful Trade Analysis

Earlier this week I was having an email discussion with a fellow STTG'r, Miguel, about the new STTG trade tools and ideas for improvements.

The discussion sparked a simple thought, what variables do investors use when logging their trades? Why?

Miguel had brought up two variables that I do not currently use myself: Target Price and Reward/Risk ratio. So, including those two with the variables we currently support as of STTG Tools v1.3, here is a full list in no particular order:

writing chalkboard

  1. Stop Price $ - The Stop Loss price ($) which can be a physical stop loss order or a mental stop. Cutting your losses short is one of the keys to success the vast majority of ultra successful traders share. Not having a cut off point where to sell and cut your losses is probably the #1 biggest mistake investors make. They also help to keep emotions at bay.
  2. Strategy - The strategy or strategies followed when making the trade. Examples: 'Long Term', 'CANSLIM', 'Warren Buffett', 'Momentum'. By tagging your trades with strategies, you can then analyze them and figure out which strategy is performing best, worst, etc.
  3. Risk $ - This is the amount of capital being risked on the trade. So, if you buy 100 shares at $100, and your Stop is at $99, then you are effectively risking $100 on the trade. Risk can also be expressed as a "R" multiple, a Van Tharp principal, and is something that has truly changed the way I approach trades.
  4. Risk % - The % risk of the trade. Using the example from Risk $, The $100 would be 1% risk ($10,000/$100).  Knowing this number lays it out nice and clean; if the stock falls to $99, then that would mean the trade was a 1% loser.
  5. Target Price $ - This is the price you would like to see the stock move to during the trade, ie your initial goal. So, buying at $100, we may set our target price at $110, meaning our goal is to hold the stock until it reaches $110. We may or may not sell the whole position at $110, instead it is simply a hypothetical initial target. Many factors effect the target price, and trades can change on a dime, which is why I've had trouble using it in the past and don't currently use it (although that may change in the near future).
  6. Return $ - The number everyone loves to see, a profit, hopefully. If our 100 shares of stock we bought at $100 reaches our $110 target price and we sell completely, then we will realize a return of $1000 ($10 per share x 100 shares).
  7. Return % - The Return $ converted into a %. Using the previous example, this would be a 10% return ($1,000 / $10,000).
  8. Return "R" - Applying R multiples, we convert the Return $ into R. Using this same example, if we had risked $100, and made $1000, then our R return would be +10R.
  9. Mistake? - Did you make a mistake or break a rule with this trade? If yes, then you mark the trade as a mistake. Mistake tracking is one of the more underused, yet very powerful variables for post trade analysis. By logging mistakes you force yourself to replay the trade in my mind and reflect back on what went right and/or wrong. Mistakes don't have to be just with selling either, they can include buying too. Example: a stock gaps up, you decide to wait, it moves up another 2%, then you buy, the stock then reverses and you sell out for a loss when if you would have bought correctly you still would have been up on the trade.
  10. Notes - Not necessarily a variable, but writing notes from the trade is critical to learning from each trade: what went right, what went wrong, what you were thinking when buying, selling, etc are all examples of what can be noted.
  11. Reward/Risk Ratio - A quick way to assess a potential trade and understand whether or not you are getting favorable odds to enter. Using the same $100 buy trade, with $99 as our Stop, and $110 as our Target we felt the stock could reach, our reward/risk ratio would be 10:1. This is extremely positive because as long as the trade works out atleast once out of 10 tries, we will still make money. This is the exact concept of the profit/loss ratio.

The question then becomes, how do these all come together?

Here is an example that Miguel provided on how he approaches a fresh trade and manages it thereafter using different variables:

1) Screen for potential trades.

2) Determine the best candidate for a possible trade through risk/ reward analysis. Stop Price - Entry Price = Risk

Entry Price - Target Price = Reward

Accept trades with Reward/Risk Ratios >= 2 preferably 3.

3) Set Entry Level to execute the trade.

4) Enter stop price.

5) Enter target price. Target price may or may not be the actual exit. More than likely it will be a partial exit of 30% of the entire position where a trailing stop may be placed to maximize the profit potential of the trade. As the trade continues to go in my favor I will take profits and ride the trend for as long as possible.

So Blain, there are several target prices as the trade begins to unfold in a favorable way. However, please note more often than not the trade will not go in my favor and will be closed out for a tolerable loss. The best trades are what I call my "dream maker" trades that will far exceed my initial target price and allow my dreams to come to fruition.

Miguel I assume then conducts post trade analysis after the trade is closed and properly logs the trade in his STTG account.

Focusing on just post trade analysis to offer an example, here is a quick overview of how I log my trade after the exit:

  1. Sell stock outright or am stopped out.
  2. Wait till market close, enter the sale information in STTG to close out the trade, mark as mistake if needbe.
  3. Take screenshot of chart and plot buy and sell points (STTG does this now automatically), add technical analysis, then upload to STTG.
  4. Record my sell notes in the trade details (more or less open thought journaling on what I felt went right or wrong, and any points to focus on for next trade).
  5. Start looking for next trade.

There are endless ways you can go about conducting post trade analysis, the key is simple, just DOING IT.

When you think about your investing or trading, what variables do you currently not use that you wish you did? What variables do you use that I am missing?