Saturday, October 17, 2009

Trading Journal

Why need a trading journal?
1. We cannot afford to keep making the same mistakes and we want to continue to do what we do best.

Investing or trading , if treated as a long-term business, must avoid mistakes being repeated and allow good moves being reinforced.

Writing down the rationale that motivates a trade will help us see a pattern in our trades. What are the common mistakes that we tend to commit? What are the common charasteristics of most of our profitable trades?

One or a few trades does not constitute a pattern, therefore unlikely to provide unbiased gauge.Optimists always remember the good trades while pessimists always remember the bad trades. How many times have we found ourselves boasting profitable trades and how many times have we mourned and groaned over failed trades. Neither is useful in forming good trading pattern. A journal that records all trade can give us a clearer and most importantly, an objective map to point out where the mistakes and good moves lie.

2. We want to trade what we plan
How many times have you heard traders say, "I could have made 50% more if I had stuck to my plan."? And how many wives have yelled at their husbands , " If I had not listened to you, I could have made $5000 more." It is just natural to want to find scapegoats instead of admitting one's mistake.

The mistake here is simply being human. Most of us, are affected by external factors. The wife, the friends, the family and the most powerful, the market. Very few of us were not rattled when everybody was talking about the end of capitalism, and the lost era, and the Great Depression once more.Very few of us can sit tight and hold on to winners when the Nasdaq has rallied more than 70% from the March-low.

Having a specific,detailed trading set-up plan written clearly in front of us can help mitigate this psychological weakness. To many of us, seeing the plan visually everyday can remind us why we want to stick to the plan in the first place.

3. We want to consider as many factors as possible

To make a good trade consistently, we not only have to be able to find the good pick and the right price, we also need to be able to recognize things that could go wrong and our contigent plans. Most of us do have these in our head. But it is common that they disappear in our memory as the number of trades increases or they have changed without giving us an alert. A trading journal serves as a constant reminder of possible risks and red flags. It allows us to constantly update and refine our plan to increase the probability of winning.

Every good trade begins with planning ahead. Sitting down and jotting down all the possible market movers such as FOMC meeting, unemployment data, companies's earning release, etc put our trade into different scenario tests so that we are not caught off-guard and have a better chance of minimizing losses should things really go wrong.

4. We want to form good trading habits/strategies

As noted above, trading journal can help identifying good trading habits and strategies. Identifying good trading habits and strategies is crucial but it is only one quarter of the game. The rest lies with the ability to execute the strategy. Repetition is the mother of all skills.

We mentally rehearse these habits and strategies every time we write down the same thing in the journal for each trade. Before we know it, it's become our second nature.

To celebrate this Saturday night (Duh!!! I know I don't have a life), I would like to share an example of trading journals with friends who are interested. Everyone has different trading needs and instruments. Therefore, each one of us will probably need to customize any template to our own style and needs. [Click the table to enlarge it]. Have a good Sunday!


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