Why do we need to Keep a Trading Journal? - PresentTrading
"Assuming a 40% success rate in your trades, with a profit of $2 and a loss of $1, should you engage in trading? "
The answer lies in evaluating your trading system using the winning rate, profit factor, and Kelly Criterion.
The winning rate measures the percentage of winning trades. For instance, in 100 trades, 40 were profitable, and 60 were losing. Although a trading system can generate a significant number of losing trades, it does not invalidate its effectiveness.
Increasing the winning rate is not helpful. The key is to ensure that the losses do not exceed the profits.
The profit factor is the ratio between the expected profit and expected loss per trade. By keeping a trading journal, you can determine your average profit and loss amounts to calculate the profit factor.
The Kelly Criterion is a tool that helps determine the percentage of capital to allocate to each investment to limit losses and maximize long-term gains. The Kelly percentage to invest = (winning rate (%) - (losing rate (%) / profit factor)).
Take home message - PresentTrading
Therefore, before making a trading decision, evaluate your trading system by analyzing the profit factor, Kelly Criterion, and winning rate using objective data and backtesting to make informed trading decisions.
In conclusion, to be a successful trader, you should evaluate your trading system and strategies using data, and make logical and objective trading decisions.
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