A plan, a journal and a backtest
What you learn in 3 minutesA plan, a journal and a backtest are three separate written records. The plan says what you will do before you trade. The journal says what you actually did. The backtest says what one rule would have done on past prices before you risked any money. On USD/ZAR around 18.4100, one rand of movement per unit is R1, so a small written rule can be checked in rands rather than in feelings.
50 trades on one rule: what the journal showed
| Step | Amount | Note |
|---|---|---|
| Rule tested | Buy USD/ZAR at 18.4100, sell at 18.4200, stop at 18.4050 | One written rule, one entry, one exit, one stop. |
| Number of trades in the backtest | 50 | The rule was applied to 50 past price points. |
| Wins | 28 | Trades that reached 18.4200 first. |
| Losses | 22 | Trades that reached 18.4050 first. |
| Gain per win | R0.0100 per unit | 18.4200 minus 18.4100 = 0.0100. |
| Loss per loss | R0.0050 per unit | 18.4100 minus 18.4050 = 0.0050. |
| Size used | 10,000 units | A chosen size for the example, not a recommendation. |
| Gross wins | R2,800 | 28 wins x R0.0100 x 10,000 units = R2,800. |
| Gross losses | R1,100 | 22 losses x R0.0050 x 10,000 units = R1,100. |
| Gross result before costs | R1,700 | R2,800 minus R1,100 = R1,700. |
The broker may round prices, charge a spread and add commission or swap on top. These vary between brokers, so the gross result above is not the amount that would reach your account.
The mistake people make here
The common mistake is to write a plan after trading, or to keep no journal at all, so the rule is never tested against real behaviour. People then remember the wins and forget the losses. Instead, write the rule first, record every trade with its date and price, and run the backtest before using money. If the journal does not match the plan, change the plan or the behaviour, not the record.Check yourself
If 28 wins gain R0.0100 per unit and 22 losses lose R0.0050 per unit on 10,000 units, what is the gross result before costs?
28 x R0.0100 x 10,000 = R2,800. 22 x R0.0050 x 10,000 = R1,100. R2,800 minus R1,100 = R1,700.
If the same rule had 20 wins and 30 losses, what would the gross result be before costs?
20 x R0.0100 x 10,000 = R2,000. 30 x R0.0050 x 10,000 = R1,500. R2,000 minus R1,500 = R500.