You must be insane if you are not keeping a Trading Journal. One of everyone’s favorite definitions of insanity is “doing the same thing over and over, but expecting different results.”
A Trading Journal is not about simply tracking your numbers and making some notes. It is about finding weaknesses to overcome and maximizing your strengths when you recognize them. That is, making improvements – improving your system and rules. (I define a system as a group of strategies.)
Here’s how it comes together: work your system, check your numbers, then make improvements.
Break the Trading Journal into three major categories: Numerical Inputs, The System, and Improvements.
Dr. Elder says, “You need to be aware of your tendency to sabotage yourself. Stop blaming your losses on bad luck or on others and take responsibility for the results.
Dr. Steenbarger says:
• Number of long and short trades – I correlate this to the trend condition of the market to see if I’m trading with the current or against it; if I’m trading in a one-sided way in a range-bound market. The number of trades also tells me if I’m overtrading.
• Number of winning and losing trades – When I’m trading well, I have more winning trades than losers by a reasonably healthy margin. When the ratio dips for more than a short time period, I need to re-evaluate my trading and my trading strategies.
• Time holding trades – I’m a short-term trader, and I tend to have a relatively narrow time band in which I hold trades. Moving beyond that band tells me I’m either cutting trades short or going for home runs—and neither of those have worked for me in the past.
• Time holding losing trades versus winners – It is very hard to make money over time by holding losers. Eventually, the size of the losers becomes greater than the winners so that even a trader who has more winning trades than losers can end up in the red.
• Profit/Loss broken down by long and short trades and broken down by market condition – This tells me if I’m trading ranges better than breakout movements; whether I’m doing better on the long side or the short side. If my performance is significantly worse in one mode than another, I start to examine my trading for needed improvements.
Add to this list as you see fit. David Waring says, “I would add to this list average profit on profitable trades vs. average loss on unprofitable trades and largest drawdown or loss the account suffered before returning to profitably.”
Van Tharp put it like this: Review your Trade Records. This is where the magic happens! Without this step all your trading efforts will be in vein. When you look over your records you must ask yourself: why did I lose here? Why was this trade profitable? What do the winning/losing trades have in common? When you ask these questions you start to learn what works and what doesn’t with you trading strategy. You will also learn how you can better limit risk while giving yourself the opportunity to make big profits. It will be easy to see your previous losses as “educational investments”. And they are!
This is about your Trading Plan and Trading Rules – your decision making processes. For instance:
The general market conditions for that specific trading day. For example is there a lot of volatility in the market, is the market trading lower or higher, ranging or trending?
Why you entered the trade.
Why you exited the trade.
The money management parameters you used in the trade and which we covered in our previous lessons on the subject.
This section of the journal answers the questions, “Now that I see the past with 20/20 vision, what would I have done differently? What did I do right? Did I miss something obvious? Did my emotional state of mind affect my success? Did I follow my System? Did I set my stop at reasonable level?” When you review your trades after the fact, it’s amazing how easy it is to your mistakes.
We all hear from traders whose great hindsight predictions make them suspect. But the Trading Journal is a hindsight tool for learning and, most of all, improving.
Make sure the journal outlines specific steps for improvement. It is not enough to write vague generalities, such as “I need to hold my winners longer”.
Your trading edge is found through learning from your previous trades.
More from Van Tharp: Find your Trading Edge. Having learned from your past, you are now ready to adjust your trading strategy in order to experiment with different tactics. This is where your past efforts will turn into enjoyment. Why? Because the unique lessons that you’ve learned will now bring you confidence.