A plan, a journal and a backtest
What you learn in 3 minutesThis lesson shows three written artefacts: a plan, a journal and a backtest. A plan says what you will do before you trade. A journal records what you actually did. A backtest shows what one rule would have done on past prices before you risked any money. In money terms, a plan and a journal are what turn a vague hope into a countable record of cost and outcome.
Fifty trades on one rule
| Step | Amount | Note |
|---|---|---|
| Rule used | Buy EUR/USD at 1.0850, sell at 1.0860, stop at 1.0840 | One rule, written down before any trade |
| Trades taken | 50 | Each trade used the same rule |
| Pip movement target | 10 pips | 1.0860 minus 1.0850 = 0.0010, which is 10 pips |
| Pip movement stop | 10 pips | 1.0850 minus 1.0840 = 0.0010, which is 10 pips |
| Value of one pip on 0.10 lots | KSh 108.50 | One standard lot is 10 units of the quote currency per pip, so 0.10 lots is 1 unit. At 1.0850, 1 unit of USD is about KSh 108.50, so one pip is about KSh 108.50 |
| Wins in the journal | 24 | Trades that reached 1.0860 |
| Losses in the journal | 26 | Trades that reached 1.0840 |
| Gross from wins | KSh 2,604.00 | 24 x 10 pips x KSh 108.50 |
| Gross from losses | KSh 2,821.00 | 26 x 10 pips x KSh 108.50 |
| Net before costs | -KSh 217.00 | KSh 2,604.00 minus KSh 2,821.00 |
The broker may round the pip value, charge a spread on each trade, and quote a different conversion rate. Spread and commission vary between brokers, so the net figure here is not the amount any one account would show.
The mistake people make here
The common mistake is to keep a journal that records only wins, or to backtest a rule on a handful of trades and call it proven. Fifty trades is a small sample, and a rule that loses KSh 217.00 before costs can look profitable if the losses are left out. Write every trade down, including the ones that hit the stop. Then compare the journal with the backtest: if the rule behaved differently in real trading, the difference is the cost you did not plan for.Check yourself
One pip on 0.10 lots of EUR/USD is about KSh 108.50. What is 30 pips worth?
30 x KSh 108.50 = KSh 3,255.00.
A journal shows 40 trades: 18 wins of 10 pips and 22 losses of 10 pips, at KSh 108.50 per pip. What is the net before costs?
Wins: 18 x 10 x KSh 108.50 = KSh 19,530.00. Losses: 22 x 10 x KSh 108.50 = KSh 23,870.00. Net: KSh 19,530.00 minus KSh 23,870.00 = -KSh 4,340.00.
You write a plan with a 10 pip stop and a 20 pip target. The journal shows 50 trades: 20 wins and 30 losses. What is the net in pips before costs?
Wins: 20 x 20 = 400 pips. Losses: 30 x 10 = 300 pips. Net: 400 minus 300 = 100 pips before costs.