Spencer Li

What is a NFT (Non-Fungible Token) and Why are They Worth Millions?

Why are NFTs non fungible tokens worth millions

Would you pay millions of dollars for digital artwork?

Welcome to the world of NFTs, or non-fungible tokens.

Just this year so far, about $1.3 billion of NFTs have traded through Ethereum network, dwarfing the activity last year.

The biggest transaction was an NFT purchased for $69.3m dollars.

At this point, you might be wondering, what is a NFT, and whether it’s even a real thing.

Sounds unbelievable? Let’s find out more about this hottest new asset class.

 

What is a NFT

What is a NFT? (Non-Fungible Token)

So, what exactly is a NFT, or non-fungible token?

Firstly, to understand what fungible means, let’s look at the concept of normal fiat currency.

If you have a $10 bill, that bill is fungible, because it is completely interchangeable with any other $10 bill. Every bill has the same value, and there is nothing unique about it.

Similarly, cryptocurrencies like Bitcoin are also fungible, meaning 1 Bitcoin (BTC) is interchangeable for any other Bitcoin and has exactly the same value.

On the other hand, NFTs, which rely on special token standards like ERC-721 (using blockchain technology) to ensure uniqueness, are non-interchangeable and each token is unique.

In this way, NFTs are like digital artwork or collectibles because they are one-of-a-kind, and ownership is locked to one particular person (the owner/buyer), making every piece a unique and limited-edition piece of work.

“Think of it like a digital passport that comes with an asset,” said Nadya Ivanova, chief operating officer of BNP Paribas-affiliated research firm L’Atelier. “They allow for this trust and authenticity to be established in a way that we haven’t been able to do before, whether it’s with physical assets or digital assets.”

Now that we have some understanding of “what is a NFT?”, let’s go more in-depth to see how they work.

 

How do NFTs Work?

What is a NFT token?

Non-fungible tokens are actually cryptographic tokens with unique identification codes and metadata that make them unique.

Created on a smart contract platform such as Ethereum, these tokens are unique and cannot be replicated.

This means that when you buy an NFT, you are essentially buying lines of code on a blockchain.

But these lines of code do have value.

They represent proof of ownership and authenticity of these digital artworks and assets, that this asset you own is uniquely and authentically yours.

This blockchain, which is a type of decentralized record-keeping on a public ledger of blocks, means that the whole world knows who officially owns the NFT.

And because it is decentralized, multiple records are stored all over the place, so it is impossible to hack the network to “steal” ownership of the NFT.

Since an NFT’s uniqueness and ownership can be easily verified, and they ensure strong property rights which cannot be stolen, they can be efficiently traded on the secondary market.

As a result, this new asset class can empower creators, such as artists, developers, in a variety of new ways that weren’t possible before, allowing them to monetise their creations more directly.

 

The Different Types of NFTs

What are NFT applications?

Back in 2017, we saw the first NFTs in projects such as CryptoPunks and CryptoKitties, where blockchain technology was used to sell online collectibles.

Since then, the industry has bloomed into a wide variety of new use cases and industries, with a market exceeding $1b dollars.

Non-fungible tokens can be used to tokenize just about anything, and so far some of the most popular NFT use cases have been:

  • Gaming assets (Axie Infinity, Gods Unchained, Sorare)
  • Attendance receipts / Event tickets
  • Subscription badges
  • Digital art (Async Art, Rarible, SuperRare)
  • Blockchain domain names (Unstoppable Domains, Ethereum Name Service)
  • Tokenized insurance policies (yEarn’s yInsure tokens)
  • Tokenized luxury goods, e.g. wine
  • Digital music (Mintbase, InfiNFT)
  • Virtual real estate (Cryptovoxels, Decentraland)
  • VR wearables

 

The Different Types of NFTs

Samples of Most Expensive NFTs Sold

Here are some recent samples of NFT artworks and related products that have been sold, proving that this is a potential multi-billion dollar or trillion-dollar market.

  • NBA’s Top Shot NFT-based trading card system – $230m in sales
  • “Everydays: The First 5,000 Days” by Beeple – $69.3m
  • CryptoPunks #7804 and #3100 – $7.6m each
  • CROSSROAD by Beeple – $6.66m
  • Collection of 10 digital artworks by Grimes – $6m
  • First Tweet by Jack Dorsey – $2.5m
  • Exclusive NFT version of their latest album by Kings of Leon – $2m
  • CryptoPunk #6965 – $1.54m
  • Auction Winner Picks Name by SSX3LAU – $1.33m
  • Not Forgotten, But Gone by WhIsBe – $1m
  • Hairy by Steve Aoki – $888,888.88
  • THE COMPLETE MF COLLECTION by Beeple – $777,777.77
  • Nyan Cat by Chris – $590k

The founder of Twitter, Jack Dorsey, recently auctioned his first tweet ever on the Twitter platform to raise money for charity.

The tweet, which said “just setting up my twttr,” was first published on March 21, 2006 and was sold for $2.9m.

 

Most Expensive NFTs Sold

What is a NFT Artwork? Is it a Scam?

So, what is a NFT artwork and how it is different from normal artwork?

When you buy a non-fungible token, what you are getting is a unique cryptocurrency token on the blockchain.

Some NFTs have only one version, so it is like owning the authentic version of a famous artwork such as the Mona Lisa.

However, things can get a little confusing here.

Because there are also NFTs which are digital versions of the reprints, kind of what you see in Pokemon cards where each card is printed multiple times.

But for each NFT, there is still a unique “watermark”, which is the code, so if yours is the original or limited edition, then the property rights or IP of the digital asset belongs to you.

For example, the “Nyan Cat” meme is freely available to anyone who wants to download a copy of it, but none of these downloads are the ‘real’ Nyan Cat NFT worth 300 ETH.

In the jargon of the art world, the difference is like owning an original versus owning a replica.

In the art world, one of the biggest problems is fake artworks.

However, because of blockchain technology, it is impossible to sell “fakes” of NFTs, because anyone can easily check the online public ledger to see who owns the real original NFT.

So in a sense, it is actually safer than physical artworks.

 

How Much is an NFT Worth? What Are the Risks?

How much should you pay for an NFT, or how much should you sell one for?

Just like dealing in valuable art pieces or collectibles, this answer is tricky because the value is totally dependent on supply and demand.

An art piece or collectible is only worth as much as what the next person is willing to buy it for.

So using that as a benchmark, you want to look out for things like artist reputation, scarcity, and provenance, including the origin and past transactions.

You can try to benchmark it against other similar pieces by the same artist, or other products in the same genre, but at the end of the day, the worth is determined by the market.

Hence, you want to make sure there is still interest and other buyers for your NFT, should and when you decide to sell it in the future.

The biggest risk is that should the NFT craze turn out to be a bubble, kind of like a game of “pass the bomb”, then you don’t want to be the fool left a bunch of worthless NFTs which you paid a lot for.

Since this is still the early phase, the risk of this is less, but the risk of a potential bubble increases if prices for popular NFTs keep increasing exponentially, akin to the Tulip Mania.

Another risk is that because NFTs are transacted in cryptocurrencies (ETH), the prices of NFT are very likely tied to the price fluctuations of cryptocurrencies.

So if you have noticed, there are sort of 2 different segments of NFTs. One is the super expensive NFTs of rare digital artworks or collectibles, while the other is the more “down-to-Earth” retail market for common folks to sell or access useful products and services.

For the former, just like the market for valuable artworks and collectibles, I feel that it is somewhat of a playground for rich investors to speculate, and not really meant for the typical retail investor.

 

How to Create & Mint NFTs

However, even though you don’t have millions of dollars to speculate on non-fungible tokens, you can still take advantage of this trend by creating and selling your own NFTs.

If you have already tried uploading photos or videos on social media platforms like Facebook, Instagram, or Tik Tok, then you already know how to create “digital artwork”.

The difference is that after creating your artwork, there is one extra step called “minting” to turn your creation into an official NFT.

To do that, you can use one of the many NFT minting platforms around the Ethereum ecosystem. Each has its own pros and cons, and different fees.

DIY (do-it-yourself) minting platforms like OpenSea, Rarible, InfiNFT, Mintbase, and Cargo let creators easily and permissionlessly mint their own NFTs.

On the higher end, there are some exclusive membership-only NFT minting platforms to which creators have to apply and be accepted before they can mint through these platforms, such as SuperRare and Async Art.

Once you have decided on your platform, you will need to upload your artwork, fill in a description, and decide whether you want to create a standalone or edition-based piece, your asset’s royalty percentage, unlockable content, etc.

Finally, you will need to make payment via ETH (Ethereum) for the approval and minting process to commence.

 

How to Buy and Sell Non-Fungible Tokens (NFTs)

Now that you have created your own non-fungible token, the next step is to find a marketplace to sell it.

You might be wondering, what is a NFT marketplace?

Thankfully, there is already such ecosystem set up, with open marketplace platforms like OpenSea, Nifty Gateway (art), Decentralland, Enjin (games), Yellowheart (concert tickets), NBA Top Shot (NBA collectibles), SuperRare (art) and Rarible where you can list your NFTs for sale easily, depending on which category your NFT falls under.

Payments are done via Ethereum (ETH) as well, so you will need to connect your wallet to the platform, in order to buy or sell any NFTs.

 

Criticism of NFTs

What are some of the current drawbacks of this non-fungible tokens system?

High Transaction Fees (Ethereum Gas Price)

If you recall in the previous segments when we talked about minting, buying and selling NFTs, there were transaction fees involved.

One problem is that these transactions fees can be quite high.

As most NFTs are on the Ethereum blockchain platform, each transaction requires the payment of Gas: the fee charged for processing a transaction or contract on the Ethereum blockchain network.

This fee is denominated in gwei: a small fraction of ETH.

Hopefully, as the market matures, and more competition comes in, the fees for these transaction costs will fall as well.

Environmental Impact

Currently, Ethereum still operates on the “Proof of Work” architecture that requires mining, which consumes a large amount of electricity and leaves a large carbon footprint.

To put this into context, the amount of electricity that the Ethereum network consumes rivals that of countries like Ecuador with a population of about 17.4 million.

Since almost all NFT transactions involve ETH, this will undoubtedly contribute to the usage of the network and electrical consumption.

Hopefully, Ethereum will be transitioning to a more eco-friendly “Proof of Stake architecture” soon, although progress has been slow since this idea was first put forth years ago.

 

Concluding Thoughts on NFTs

Currently, the NFT transactions attracting all the hype are the super expensive transactions similar to valuable artworks or rare collectibles.

While these garner the headlines, the more relevant applications NFTs could lie in empowering independent creators such as artists and developers to directly monetise their creations.

The huge potential also lies in the myriad of products and services which businesses (both small and large) can create or tie-in with their existing offerings in the offline world.

This means that in a couple of years, many of these products and services could become commonplace in our lives, unlocking a trillion-dollar market opportunity.

Now that I have shared all you need to know about NFTs, what do you think of this new asset class? Is it a bubble or is it here to stay? And if someone asks you “what is a NFT?”, will you be able to explain it to them?

Let me know in the comments below!

 

thumbnail the ultimate guide to blockchain and crypto assets

If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

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Spencer Li

Is Trading Gambling? (How to Profit Consistently Like a Casino)

is trading really risking like gambling

 

You have probably heard horror stories of people losing all their hard-earned money in the financial markets, or even going into debt.

This makes you wonder if you should avoid any form of high risk trading or investing, and just stay away from the financial markets.

But is trading really that risky? Is trading gambling, similar to a night at the casino? Is the chance of losing everything really that high?

Or is there a proper way you can do it safely?

 

Is Trading Gambling

 

In this blog post, I’m going to talk about the risks of trading and investing, discuss the question “is trading gambling?”, and whether it is the same as gambling in the casino.

 

Similarities of Trading & Gambling

Most people agree that gambling is definitely risky, and is a sure-lose proposition in the long run. And I don’t dispute that.

What about trading then? Is it the same? Is trading gambling?

At first glance, trading appears to be very similar to gambling, which is why many people tend to lump them together, and deem it to be intrinsically risky, with the high possibility of a huge loss.

However, while there are some similarities, there is actually a major difference between these two activities.

Firstly, for the similarities.

Trading and gambling both involve a certain element of luck and skill, as well as probabilities and uncertainties.

If I had to make an estimate, I would say 80% skill and 20% luck, if you are trading, but 20% skill and 80% luck if you are gambling.

Both present the opportunity to make or lose huge amounts of money in a short period of time, depending on your skill level.

That is why both pursuits require good money management skills and strong psychology.

 

Is Trading Gambling? (It Depends on Your Edge)

However, there is one big difference – the mathematical edge.

So to answer the question of “is trading gambling?”, whether you are trading or gambling depends on whether you have the edge.

Simply put, this refers to whether probability is on your side.

If you are a professional trader or a professional gambler, and you have the edge, then you will likely be profitable in the long run.

If you have no idea what you are doing when trading or gambling (you do not have the edge), then you will most likely lose in the long run.

In a casino, since most people have no idea what they are doing, and most people are just there to have fun, the casino usually has the edge, and hence it wins most of the time.

So in order for you to beat the casino, or other players in the financial markets, you need to have an edge.

As I covered in my other posts, your trading plan and trading journal should help you develop that edge.

 

What is Expected Outcome in Trading?

Before I move on, let me explain what this edge is all about.

To do that, we need to bring in the important concept of “expected outcome”.

Without going into the detailed math (which I have covered in another post), the “expected outcome”, or E(X), tells you whether your strategy is profitable in the long run.

If your expected outcome is positive (more than zero), it means that over the long run, your strategy does have the edge, and you will be profitable.

On the other hand, if your expected outcome is negative (less than zero), then it means that over the long-run you will lose money.

 

How to Calculate Expected Outcome

How then, is this expected outcome calculated?

It depends on 2 main factors, namely:

  • Your hitrate (or winrate)
  • Your reward-to-risk ratio (RRR for short)

Your hitrate is your winning percentage, for example a 70% hitrate means you win 70% of the time, and lose 30% of the time.

Your RRR is the ratio of how much you make when you win, versus how much you lose when you are wrong.

When you combine these 2 components, you can calculate your expected outcome, which will tell you whether you have the edge.

In trading, doing your analysis and taking a calculated risk tilts the probability in your favour, while in gambling, such as in a casino, the odds are always against you.

 

How Often Do You Need to Win to Be Profitable?

Some people have asked: Is it possible to make money if you only win 40-50% of the time?

The answer is yes.

If you make more money when you win, as compared to your losses when you lose.

For example, if you make 2-3x returns whenever you win, but only lose 1x when you are wrong, and you win 50% of the time, your expected outcome is still positive.

So it really depends on the strategy which you are using.

There are many different types of strategies, with different combination of hitrate and RRR, which can all give a net positive outcome.

For example, you could have a lower hitrate and high RRR, like the one mentioned above, or you could have a higher hitrate and lower RRR.

In a sense, this is a trade-off, but you just need to find the right balance of hitrate and RRR that gives you a positive expected outcome.

 

How to Beat the Casino

Another important concept is the law of large numbers.

We previously established that if you have the edge, your expected outcome is positive, and you will be profitable in the long-run.

But how do we ensure that you last long enough to take advantage of the long run?

In other words, how do we ensure that you do not blow up your account (lose all your capital) before you are able to utilize that trading edge?

In statistics, the law of large numbers states that the larger your sample size (the number of times you trade or gamble), the closer your outcome will be to the expected outcome.

So, the solution is actually quite simple.

All you need to do is to make sure you spread out your money over many trades. Because the more trades you take, the more likely your results will match the expected outcome (which is positive).

In gambling, since you do not have the edge, your best bet is to actually do the opposite, which is to take a handful of large bets, and quit the moment you’re up, because the longer you play, the more likely you will lose money in the long run.

By doing so, you can take away the edge that casinos have.

On the other hand, if you have the trading edge but you do not manage your money well, then you are taking away the edge that you have.

At this point, if you are still wondering “is trading gambling?”, the strategy for gambling and trading are exact opposites.

 

Can You Follow the Plan?

One other important factor to consider is the psychological and emotional aspect of trading/gambling.

Because money is at stake, many people are unable to make logical decisions or execute their strategy systematically.

If you have a strategy which has an edge, but you execute it differently, then you are either giving up that edge, or worse, changing your strategy into one which has a negative expected outcome.

For example, if you do not fully optimize your winning trades (taking profit too early), or you do not manage your losses well (not cutting losses), then your RRR will change drastically.

This is because your reward will be lower than expected, and your risk will be higher than expected, so your overall RRR will be much worse.

This could be enough to destroy whatever edge you have, and tip your expected outcome from a net positive to a net negative.

It doesn’t make sense to come up with a great strategy and trading plan, and then choose not to follow it due to conflicting emotions.

 

 

Are you making decisions or just guessing?

Are you making decisions or just guessing?

 

Concluding Thoughts

In conclusion, the greatest risk is not trading or gambling, but rather the player.

The risk involved is not dependent on the activity itself, but rather the expertise and experience of the person doing it.

Professional poker players (who are not gamblers) win because they do not play by pure luck (gambling), instead they use a system that gives them an edge over other players in the long run.

The reason why people lose big in trading is because they trade without a method or system which gives them an edge, or even if they do have an edge, they do not take full advantage of the edge, and instead take single large bets instead of many small bets.

This is why position-sizing, capital allocation and risk management are such essential concepts in trading.

Emotions, such as greed and hope, also tends to cloud better judgment even when one should know better, and erodes the trading edge in their strategy.

Most traders tend to see only the upside in their trades, and not the downside, hence they sell quickly once they see a profit, but hold on to losses in hope that these would turn around.

These are the main reason why many traders who have the edge are still unable to grow their accounts.

So if you want to be profitable in trading, just keep in mind these 3 things:

  1. Have a trading plan & strategy which gives you an edge
  2. Spread your capital over a large number of trades
  3. Manage your emotions and execute your trading plan

 

Now that I have shared the main difference between trading and gambling, do you still think that trading is as risky as gambling? How will you explain if someone asks you “is trading gambling?”, and what is the difference?

Let me know in the comments below!

2 Comments/by
Spencer Li

Why Paper Trading is a Waste of Time (And What are Better Alternatives?)

Final paper trading thumbnail

You probably have heard of paper trading, but do you know that most people are doing it wrongly and it ends up being a waste of time?

As a new trader, does it make sense to start off with paper trading and what is the correct way to do it?

In this blog post, I’m going to talk about paper trading, the correct way to do it, and discuss whether it is worth your time doing it.

If you would like to learn all the essential elements to kickstart your trading journey, also check out: The Beginner’s Guide to Trading & Technical Analysis

 

Why Paper Trading is a Waste of Time

 

What is Paper Trading?

Firstly, what is paper trading?

Paper trading or demo trading or virtual trading, is the idea of trading with fake money, thus simulating the experience of trading yet avoiding the risk of losing any money.

Basically what this means is that you use a virtual account or a demo account and this simulates trading but you are not actually using any real money to trade.

So, in this sense, you do not actually lose any money.

When you are starting out, it makes sense to start with less capital or fake money, and focus first on honing your trading skills.

You can then always scale up or use real money as your skill gradually improves.

This makes sense because for new traders, most of the mistakes are made when you are starting out and so the idea is for you to minimize the cost of those initial mistakes by using fake money.

This can be a good idea for the first 10 to 20 trades where you just want to get an idea of how to execute the trades and the process of managing those trades, however the main problem with paper trading is that you cannot learn any real trading psychology if you just do paper trading.

Because if you recall, the mindset or trading psychology is a major factor in trading success.

Imagine playing poker with fake money. Is it still the same experience? Definitely not.

Because trading similar to poker in many ways, test your ability to make good sound decisions under the stress of having money at stake.

Without any skin in the game or any real money at stake, the experience is just not the same.

 

Ways to Paper Trade

What are some of the ways that you can paper trade?

The easiest way is to simply use pen and paper or a spreadsheet to record your trades.

For example, if you’re browsing the charts and you spot a good opportunity, and you decide “I’m going to buy x number of lots at this price” and you record down the trade, then as the price progresses you can record down “I’m going to exit at this price”, and whether you made a winning trade, how much you made, etc.

This is a more manual way of recording your trades.

But now with a lot of software available in the market, such as Tradingview or if you are using any brokerage platforms, they usually provide you with a demo trading account, so this allows you to trade on the products that are available on the platform where you can buy and sell the products using a demo account and all the transactions will be recorded.

It’s easy for you to refer back to all the transactions and trades that you have made.

These are the 2 easiest ways of paper trading.

 

How to Paper Trade Correctly?

Next, how do you paper trade correctly?

Earlier on, I mentioned that many people are doing it wrongly and hence it ends up being a waste of time.

If you want to get the most out of your paper trading, there are 3 important things that you need to take note of.

The first is you need a trading plan, like I mentioned in my previous videos.

Check out: How to Craft a Winning Trading Plan (The 7 Key Ingredients)

Before you place any trades, whether it’s on a real account or demo account, you need to plan out the trade fully.

You need to know what strategy, what time frame, what product, where you’re going to enter and exit your trade.

You need to have everything planned out before you even take the trade, because if you’re going into paper trading and you’re just randomly buying and selling, then there is no learning
or experience at all because you don’t even know what you are doing, so whether you win or you lose, at the end of the day, you have no idea whether what you did was right or wrong.

The second thing that you need to have is the trading journal.

Check out: How to Create a Trading Journal (And Discover Your Edge in the Markets)

Basically, you want to record down the whole process of your decision making, your buying and selling, what emotions are involved, the decisions that you made, why you made all these
decisions, because all these data from your trading plan and your trading journal will help you formulate and improve your strategies such as when you go to real trading.

The last thing which is the most important, is to treat your paper trading account or your demo account as if it is a real trading account.

This is the closest thing you can get to simulating the trading psychology, because if you treat your fake money as real money, then at least when you make the decisions, you will apply your proper money management and risk management rules.

 

Pros & Cons of Paper Trading

What are the pros of paper trading?

Firstly, there is no risk involved because you are using fake money on a demo account so even if you make a lot of beginner mistakes, for example you you accidentally key in the wrong orders,
or you press the wrong buttons, it doesn’t matter because you can then reset your account and do it properly the next time.

In a way, it’s a cost-free way of learning and making mistakes.

The next thing is to gain confidence because as you familiarize with the platform and the ways of executing the trade, you also gain confidence in your strategies and at the same time, you are also testing out whether the strategies work.

This works best if the demo platform you are trading on is the same as the actual platform you will be trading on once you move into live trading.

After paper trading for a period of time, if you are actually making good profits, it means that your trading strategy probably should work in the real market as well.

The third point is that in a way, it is also forward testing your trading strategy because after deciding what the strategy is in your trading plan, you are now testing it forward as opposed to back-testing.

What are the cons of paper trading?

The most obvious one like I mentioned before is that there’s no skin in the game, so it is hard to learn trading psychology when real money is not involved.

The next risk is overconfidence because you might think that you know you are doing very well on paper trading, only to realise it is not the same when it comes to real money.

This phenomenon is something I frequently noticed when I was trading professionally at hedge funds.

A lot of people do well on the demo account or the paper trading phase, but when it comes to real money, they somehow lose that confidence or they become too overconfident and thus, they
tend to blow their accounts.

The next point is slippage and commissions.

When you are trading with paper trading or demo accounts, it may not necessarily accurately reflect any slippage or commissions, which are the transaction costs that are involved in real trading, so you might want to take note of that, especially if your trading strategy involves a lot of transactions, then this could become significant.

The last disadvantage for paper trading is if you are just looking for a way to see if your strategy works, then back-testing does a much better job that paper trading.

You can test easily 10 to 20 strategies, by computerizing it so that you can test multiple strategies at one time before you even start trading.

Hence, back-testing is way more efficient if you are looking for a way to see if your strategy works.

 

Summary of Paper Trading

In conclusion, my advice to new traders is to start off with paper trading for about 10 to 20 trades, then move on to trading a small account with real money.

You can get used to being able to execute trades when you are doing the paper trading phase, but eventually when you move on to the real account, then you can see how their trading psychology is like when there’s real money at stake, so it doesn’t matter how small you start with as long as it’s real money, then you can slowly scale up and gain confidence trading real money.

To sum up, what I would recommend is to:

  • Use back-testing to test your strategies and once you have a good strategy, then you
  • Use paper trading to familiarize with the process and after that once you are familiar with the process, then you
  • Move on to real trading to train your trading psychology.

That is the whole flow and the process of progression in trading.

So now that I’ve shared the correct way to do paper trading, do you still think paper trading is useful and have you tried it out for yourself?

Let me know in the comments below!

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Spencer Li

How to Create a Trading Journal (And Discover Your Edge in the Markets)

how to create a trading journal thumbnail

Have you ever wondered why you keep making the same trading mistakes over and over again?

As you start your trading journey, one very important habit to cultivate is to have a good trading journal, which is why in this blog post, I’m going to share with you how you can start a trading journal and use it to effectively improve your trading results.

If you would like to learn all the essential elements to kickstart your trading journey, also check out: The Beginner’s Guide to Trading & Technical Analysis

 

How to Create a Trading Journal

 

Trading Journal #1 Plan New Trade

The first thing to record is the planning of your new trade.

You should already have a trading plan before you even start trading, but before you actually execute the trade, it is good to record down the trade in your trading journal.

  • Why are you taking this trade?
  • Why is this a good trade?
  • What is the strategy behind it?
  • What is the reason or the rationale for you wanting to take this trade?
  • What are the pro factors? The negative factors?

Everything should be recorded down, basically your whole thought process of your decision-making of how you come about to decide whether you want to take this trade or you want to pass on this trade.

So all that should be recorded down in your trading journal for future reference.

 

Trading Journal #2 Execute Your Trade

Next is the execution of the trade.

  • What was the reason and analysis of each decision point during the trade?
  • For example, when you’re making the entry, why are you entering at this price?
  • Why not wait a little bit later?
  • Why not enter at a better price or when you are going to exit the trade,
  • Why do you want to take profits?
  • Why not let the trade run further?

All these things should be recorded down in your trading journal.

Basically, why you make every decision along the way.

 

Trading Journal #3 Record Your Trade

Next, you’re going to record the trade itself in your journal, meaning all the trade parameters.

You’re going to record:

  • What type of trading style was it?
    Was it a long-term trade? A medium-term trade, a short-term trade?
    So that will correspond to whether it’s position trading, swing, trading, or day trading.
  • And what was the product that you traded?
    Was it forex, a stock, an option or a derivative?
  • Next, what was the timeframe?
    Was it on a 5-minute chart, a 1-hour chart, a daily chart, a monthly chart?

These are all the standard perimeters that should be recorded down in your trading journal.

Next up, you should also record down your entry price, stoploss price, and target price. These are the bare minimum parameters that you need to have for each trade.

  • The entry price (EP) is the price that you entered the trade.
  • The stoploss price (SL) is the price that you get stopped out.
    So if it’s a losing trade, and you got stopped out, then you record the price which you got out or if you didn’t get stopped out, you also record down the stoploss price, because that is the price that intended for it to be the stoploss.
  • And lastly, the target price (TP) will be the price that you choose to take profit at.
    If you actually stagger your trade, for example, you take half profits at certain price or decide to trail, and shift your stoploss or different variations of position management.

All this is useful information to see whether the position management strategy that you’re using is actually effective, or maybe it might be too complicated and decreasing the optimal returns that you should be getting.

Next, you should also attach a chart of your entry and exit in your trading journal.

Ideally the chart should be labeled with as many things as possible. Other than your entry and exit, you can label where you shift your stoploss or scale in or out of positions.

You can also choose to label your thought process directly on your chart.

So for example, if you choose to make your journal soft chart-based, then you could also record down most of the information directly on your chart, and then you’ll save a screenshot of it.

It might be easier for you to reference. All you have to do is just look through all the different charts, compilations. All the information is already on the chart.

However, it will not allow you to effectively analyze the data.

If you record it on a spreadsheet instead, then it’s easier if you want to do analytics to review the numbers and your profits.

This is a trade-off. Or you can do both if you have the time.

But the bare minimum you should have is to at least have an attached chart so that when you look at the chart, you can remember what this trade was about.

 

Trading Journal #4 Record Your Emotions

Lastly, the most important thing is to record down in your trading journal is your emotions throughout the trade.

Many traders tend to neglect this aspect because they think that they just want to record the hard data, so they don’t really record down how they were feeling or why they made this decision.

But trading is an emotional activity.

It’s largely psychological, but your emotions still do play a big role.

A large part of trading is how well you can effectively manage this emotion.

So the first step to understanding or managing the emotions, is to be able to record it down.

For example, when you were taking this trade,

  • Were you feeling fear?
  • Were you afraid that you might miss out the trade or feeling greedy?
  • Or were you feeling hopeful or hesitant because maybe you were previously been burned in your last trade?

All these emotions are very important because subconsciously, they may affect your decision-making.

 

Trading Journal #5 Review Your Trades

The next segment is how to use these data that you have collected from your trading journal to improve your trading results.

The frequency at which you do your review will depend on your trading style.

If you are doing swing trading, then maybe you can do a review at the end of every week; if you are day trading, then you could do it at the end of every day.

The main point of this review is to look for areas of improvement.

What are some of the things that you should be looking out for?

  • Did you follow your trading plan?
    You should have a trading plan before you even start trading, so you can compare the before and after, (your trading plan versus your trading journal), how closely do they match up?
  • If you deviated from your trading plan, why did it happen?
    Was it because of certain emotions or was it some impulse?
  • So with that, then you need to decide whether it is the plan needs to be improved or whether it is you who needs to improve so that you can be more disciplined to follow the trading plan.

The next level is to go down to each individual trade, for example, for every trade:

  • Why was it a winning trade?
  • Why was it a losing trade?

Just because a trade is a winning trade doesn’t necessarily mean that it was a perfect trade or you did everything correctly because there’s an element of chance.

Even if you broke all your trading rules and you traded horribly, there’s still a chance that you might end up with a winning trade, but that doesn’t necessarily reflect your ability to trade.

And it definitely doesn’t mean that you should replicate this behavior in the future.

It’s important to not just see the trade as winning trade equals good trade and losing trade equals bad trade, but to understand the underlying reasons for why it was a winning trade and why it was a losing trade.

For losing trades, was it due to poor execution or was it due to market conditions?

So similar to the idea put forth earlier, just because a trade was a losing trade doesn’t necessarily mean that it was a bad trade because you can do everything perfectly and executed everything according to plan and it could still turn out to be a losing trade simply because no trading strategy is 100%.

Even if your trading strategy is 70%, there is still a 30% chance that the trade will be a losing trade, even if you did everything correctly.

The key thing is to see how closely you follow your plan, whether you execute everything according to your plan.

As I said earlier, it’s a matter of reviewing everything and seeing whether the plan needs to be improved and changed, or whether it is you who needs to improve your discipline, such that you can be less emotional and be able to execute the plan which you have come up with.

And that is the key to being a good trader.

 

Summary of Trading Journal

So to sum up, I’ve shared with you 2 main segments of the trading journal.

The first was all the things that you need to record in your trading journal. (Parts 1 to 4).

That’s how you can create a good trading journal.

The second part is how you actually use this information to improve your trading results. (Part 5).

So remember that all successful traders, even professionals, they keep a trading journal.

And in fact, this is quite a standard practice for many of the funds and financial institutions, especially for some that I used to work at.

It was common practice that they want all the traders to have a trading journal so that when you are reviewing it with your manager or your bosses, there’s a record and it actually helps them understand your trading style and your trading decisions on a day-to-day basis.

Even if you are trading on your own, it’s actually very important to have this trading journal because you will be able to better understand yourself as well.

Only you will be able to figure out your strengths and your weaknesses.

So having this trading journal gives you a window into your own trading psyche and allow you to fine tune your trading strategies and thus, improve your trading results.

For all new traders out there, do you currently have a trading journal and for seasoned traders, how useful is a trading journal when you were starting your trading journey?

Let me know in the comments below!

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Spencer Li

Is the Stock Market Heading for a Correction? (While Bitcoin Surges…)

is the market heading for a correction thumbnail

After the sharp run-up in stocks from last year’s March lows, some people are starting to wonder if the market has got a bit too bubbly.

In this post, we will compare the different stock indices, as well as some other products, to see if there are any good opportunities.

 

The Meteoric Rise of Bitcoin

Meteoric Rise of Bitcoin

When placed on the same scale, the epic 700+% returns on Bitcoin (BTC/USD) dwarfs everything else, and has also provided some of the best returns for my portfolio last year.

Looking at its strong trend, it does look like there are a few more legs for it to go, so I will hold onto it for now.

To see the rest of the products, I will now remove Bitcoin from this comparison.

 

Overview of Various Markets

 

Overview of Various Markets

 

The top 3 you see are the 3 indices of the US stock market, and the one in candles is the S&P 500. The other 2 are the Dow Jones Index and the NASDAQ.

The Nasdaq had the sharpest recovery at the start, but the other 2 recently caught up, especially in the last few weeks where the NASDAQ corrected sharply.

So in terms of percentage recovery, all 3 indices are roughly at the same level.

Next if we look at the line in dark purple (2801), which is one of the China Stock ETFs which I invest in, it had a good run, and just earlier this year it was on par with the NASDAQ.

However, in recent weeks, it has corrected sharply and is now below the 3 US stock indices.

The STI Index (Singapore market) was pretty much lackluster last year, but has picked up in recent months, making it one of the top performing stock markets this year.

The last line on the chart is Gold (one of the Gold ETFs to be specific), and it seemed to have hit its recent peak in August last year.

 

Will Rising Rates Kill the Stock Market?

 

Kill the Stock Market

 

Historically, rising yields have led to recessions, but the lag time could be years, so it’s not like we won’t be able to see it coming as it happens.

 

Kill the Stock Market 2

Kill the Stock Market 3

 

Looking at the charts of bond prices (which are an inverse of interest rates), we can see that it peaked around the same time the stock market bottomed (March 2020), and in recent weeks has been dropping faster.

This in itself it not necessarily a bearish indication for stocks, because it is more of a sign of potential rising inflation, but as long as inflation remains low, then it may not necessarily be bad for stock prices.

Which means the best way is still to check out the charts of the stock indices.

 

Chart Analysis of S&P 500

 

Chart Analysis of S&P 500

Chart Analysis of S&P 500 2

In summary, the stock indices are currently trading within a sideways range after a long run-up, so it won’t be surprising if there is some medium-term correction before the trend continues.

Stay tuned for more real-time market updates in our Telegram channel:
?? https://t.me/synapsetrading

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