A plan, a journal and a backtest

A plan is a written rule you make before you have any money at risk. It says which instrument you will trade, such as EUR/USD, the size of each trade in lots, the stop distance in pips, the target distance in pips, and the maximum number of trades you will take in one day. Write it in shillings as well as pips, so you can see the cost of one loss before it happens. Without those numbers on paper, every decision becomes a guess made under pressure.

Compare two beginners. The first writes a plan on a sheet of paper: 0.10 lots on EUR/USD, 10 pip stop, 20 pip target, no more than three trades a day. The second keeps the same ideas in their head. On the third losing trade the first person stops because the plan says three is the limit. The second person takes a fourth trade to win the money back, and the loss grows. The difference is not skill. It is that one limit was written down and the other was not.

A plan also states what you will not do. It can say you will not trade during a news release, you will not move a stop further away, and you will not add to a losing position. Each of those rules removes a decision you would otherwise make while the price is moving. The plan is not a prediction. It is a list of actions you have already chosen, so that the only work left is to follow them.

A journal is the record of what you actually did, written after each trade closes. For every entry, note the date, the instrument, the direction, the entry price, the exit price, the stop and target you set, the result in pips, and the result in shillings after the spread and any commission. Add one line on why you entered, in plain words. That line is what lets you compare your plan with your behaviour later.

The common mistake is to write down only the wins, or to leave out the trades that hit the stop. If you omit losses, the journal stops being a record and becomes a story. Take a journal with 40 trades: 18 wins of 10 pips and 22 losses of 10 pips, at KSh 108.50 per pip. The wins are 18 x 10 x KSh 108.50 = KSh 19,530.00. The losses are 22 x 10 x KSh 108.50 = KSh 23,870.00. The net is KSh 19,530.00 minus KSh 23,870.00 = -KSh 4,340.00. Leave out the 22 losses and the same journal looks like a profit. It is not.

Write the journal in shillings, not only in pips, because that is the money that leaves your account. The pip value itself can vary: the broker may round it, charge a spread on each trade, and quote a different conversion rate from KES. Spread and commission vary between brokers, so the shilling figure in your journal is your own record, not a rate anyone else will see. Keep the arithmetic beside each line so you can check it.

A backtest takes one rule and applies it to past prices to see what it would have done. You do not need software. Pick a period, such as the last three months of EUR/USD, and step through the chart bar by bar. For each signal, write down the entry, the stop, the target and the result in pips, exactly as the rule defines them. Then add the results the same way you would in a journal.

Use one rule at a time. A plan with a 10 pip stop and a 20 pip target, tested over 50 trades with 20 wins and 30 losses, gives 20 x 20 = 400 pips on the wins and 30 x 10 = 300 pips on the losses. The net is 400 minus 300 = 100 pips before costs. That figure is not a promise. It is what that one rule would have produced on those past prices, and it says nothing about the next 50 trades.

Fifty trades is still a small sample. A rule that loses KSh 217.00 before costs can look profitable if the losses are left out, and a run of ten wins can appear in a rule that loses over a year. After you trade the rule for real, compare the journal with the backtest. If the rule behaved differently in live trading, the gap is the cost you did not plan for, such as spread, slippage or a stop that filled at a worse price. That comparison is the reason all three artefacts exist.