Article

Why Post-Trade Analysis Is Important To Succeed In The Markets?

26 Apr 2018

Why did I lose money on my investments? What can I do differently to earn a profit from my trades? What strategy should I use?

These are some common questions all investors ask of themselves (or others) at a certain point in their trading career. However, to find the answer to these questions, you have to be prepared to do some groundwork. You need to figure out what you did wrong while trading in the market and what you could have done to avoid it. This can be done through ‘post-trade analysis’, a technique successful investors use to beat the odds.

The basics: Who? Where? When? What? Why?

The WHO factor

You are the only one ‘who’ is responsible for mistakes committed in the share market and claiming that you invested only because someone said so will always lead to more losses. To answer the ‘WHO’ question: It's ‘you’ who has to do the hard work to earn profits on your investments.

The WHERE factor

While it is not as relevant as the other ‘W’s, it can help you understand the pattern of your decision-making process. For example, if you mark your trade with the place where you took a particular decision — like on a vacation or while on the job — you can tell if you have a habit of making poor decisions at specific places.

The WHEN factor

This constitutes the date you made the trade for a particular investment. Post-trade analysis requires you to mark your trades with the specific date on which you purchased an investment. You should know if particular events on the said day affected your investments in one way or another. It is a critical aspect of post-trade analysis.

The WHAT factor

The ‘WHAT’ factor of post-trade analysis can include the following things:

•    Investment price

•    Stock + ticker

•    Strategy used

•    Sector / industry

•    Stop loss price and subsequent adjustments

•    Initial portfolio allocation

•    Target price

•    Sales price

•    Profit and loss (after sales result)

•    Risk/reward ratio

The WHY factor

The ‘WHY’ factor includes your explanation for purchasing a specific investment and what you were thinking while buying it. For example, you can write, “The company seemed good, and there was scope for growth in the future. The share prices were in my budget, and the target price seemed achievable; hence, I bought the shares.” This will allow you to understand your decisions and eventually improve your trading decisions in the future.

Steps for a proper post-trade analysis

1. Make an excel sheet of all your trades and answer all the above-mentioned questions for each trade. The excel sheet should ultimately provide information on your profit or loss and the return on a particular trade.

2. Always try to pull up the stock chart of your investment and take a screenshot (screengrab) with the relevant timeframe. The timeframe can differ according to the trading strategy implemented. If you are a day trader, you will have to take several screenshots in a given day, and if you are a long-term investor, you can wait for a week or two to take the screenshots and log them in your excel sheet.

3. Mark your trades with relevant technical analysis. You can use symbols to mark points where you bought or sold a security along with the percentage of your position (20%, 25%, 50%, etc.). This will enable you to understand how a particular trade played out in the end.

4. Do not forget to answer the ‘WHY’ factor. It is entirely possible that you may not remember what your state of mind was when you purchased a security over a year ago. Hence, it is pertinent that you record this information even as you make a trade to improve your investment methods.

5. After you have marked your trades with all the relevant information, it is time you review and analyze what was done right and more importantly, what was done wrong or could have been done better. This overview is the most important aspect of post-trade analysis. It will tell you whether your strategy is good enough to help you make profits or whether you should consider improving or changing it to achieve better results.

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Beginner's Corner

Why Post-Trade Analysis Is Important To Succeed In The Markets?

26 Apr 2018

Why did I lose money on my investments? What can I do differently to earn a profit from my trades? What strategy should I use?

These are some common questions all investors ask of themselves (or others) at a certain point in their trading career. However, to find the answer to these questions, you have to be prepared to do some groundwork. You need to figure out what you did wrong while trading in the market and what you could have done to avoid it. This can be done through ‘post-trade analysis’, a technique successful investors use to beat the odds.

The basics: Who? Where? When? What? Why?

The WHO factor

You are the only one ‘who’ is responsible for mistakes committed in the share market and claiming that you invested only because someone said so will always lead to more losses. To answer the ‘WHO’ question: It's ‘you’ who has to do the hard work to earn profits on your investments.

The WHERE factor

While it is not as relevant as the other ‘W’s, it can help you understand the pattern of your decision-making process. For example, if you mark your trade with the place where you took a particular decision — like on a vacation or while on the job — you can tell if you have a habit of making poor decisions at specific places.

The WHEN factor

This constitutes the date you made the trade for a particular investment. Post-trade analysis requires you to mark your trades with the specific date on which you purchased an investment. You should know if particular events on the said day affected your investments in one way or another. It is a critical aspect of post-trade analysis.

The WHAT factor

The ‘WHAT’ factor of post-trade analysis can include the following things:

•    Investment price

•    Stock + ticker

•    Strategy used

•    Sector / industry

•    Stop loss price and subsequent adjustments

•    Initial portfolio allocation

•    Target price

•    Sales price

•    Profit and loss (after sales result)

•    Risk/reward ratio

The WHY factor

The ‘WHY’ factor includes your explanation for purchasing a specific investment and what you were thinking while buying it. For example, you can write, “The company seemed good, and there was scope for growth in the future. The share prices were in my budget, and the target price seemed achievable; hence, I bought the shares.” This will allow you to understand your decisions and eventually improve your trading decisions in the future.

Steps for a proper post-trade analysis

1. Make an excel sheet of all your trades and answer all the above-mentioned questions for each trade. The excel sheet should ultimately provide information on your profit or loss and the return on a particular trade.

2. Always try to pull up the stock chart of your investment and take a screenshot (screengrab) with the relevant timeframe. The timeframe can differ according to the trading strategy implemented. If you are a day trader, you will have to take several screenshots in a given day, and if you are a long-term investor, you can wait for a week or two to take the screenshots and log them in your excel sheet.

3. Mark your trades with relevant technical analysis. You can use symbols to mark points where you bought or sold a security along with the percentage of your position (20%, 25%, 50%, etc.). This will enable you to understand how a particular trade played out in the end.

4. Do not forget to answer the ‘WHY’ factor. It is entirely possible that you may not remember what your state of mind was when you purchased a security over a year ago. Hence, it is pertinent that you record this information even as you make a trade to improve your investment methods.

5. After you have marked your trades with all the relevant information, it is time you review and analyze what was done right and more importantly, what was done wrong or could have been done better. This overview is the most important aspect of post-trade analysis. It will tell you whether your strategy is good enough to help you make profits or whether you should consider improving or changing it to achieve better results.