A plan, a journal and a backtest
What you learn in 3 minutesThis lesson is about three written things: a plan, a journal and a backtest. A plan says what you will do before you open a chart. A journal says what you actually did. A backtest says what one fixed rule would have done in the past. None of them promises a profit. They only make your decisions visible on paper, in pesos, so you can see whether the rule is repeatable.
50 trades, one rule, one journal
| Step | Amount | Note |
|---|---|---|
| Trades recorded | 50 | every trade taken under the same written rule |
| Trades that gained | 28 | counted from the journal, not estimated |
| Trades that lost | 22 | 50 minus 28 |
| Average gain per winning trade | 12 pips | sum of the 28 gains divided by 28 |
| Average loss per losing trade | 8 pips | sum of the 22 losses divided by 22 |
| Gross pips from winners | 336 pips | 28 x 12 pips |
| Gross pips from losers | 176 pips | 22 x 8 pips |
| Net pips before costs | 160 pips | 336 minus 176 |
| Value of one pip on 0.10 lots | ₱58.53 | one standard lot is 10 units of the quote currency, so 0.10 lots is 1 unit; converted at about ₱58.53 per unit |
| Net result before costs | ₱9,364.80 | 160 pips x ₱58.53 |
The broker may add a spread on every entry and exit, and may charge a commission or a swap for positions held overnight. Those costs are not in the figures above and they reduce the result. The exchange rate used to convert the quote currency into pesos also moves, so the peso value of one pip changes from day to day.
The mistake people make here
The common mistake is to write the plan after the trade, not before it. People look at a chart, take a trade, and then invent a reason that fits what happened. That is not a plan and it is not a journal. Write the entry rule, the exit rule and the maximum loss in pesos before you place anything. Then record every trade, including the ones you would rather forget. A journal with only the good trades tells you nothing about the rule.Check yourself
A journal shows 40 trades: 24 winners averaging 10 pips and 16 losers averaging 6 pips. What is the net result in pips before costs?
Winners give 24 x 10 = 240 pips. Losers give 16 x 6 = 96 pips. Net is 240 minus 96 = 144 pips.
Using the same journal, what is the net result in pesos on 0.10 lots if one pip is worth ₱58.53?
144 pips x ₱58.53 = ₱8,428.32, before spread, commission or swap.
Why does the same 160 pips in the worked example not always equal ₱9,364.80?
Because one pip is 10 units of the quote currency on one standard lot, and that unit is converted into pesos at the current rate. If the rate changes, the peso value of the same 160 pips changes too.