Recording all of your trading activity can seem rather tedious at times. After all, you can easily check your brokerage account balance online anytime you want to, and your broker keeps a ledger of all your trade entries and exits. So why spend your precious time creating your own log? Here’s a short list of obvious and not-so-obvious reasons.
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- Distinguish account deposits and withdrawals from trading profits and losses.
When we’re trying to determine how well our investing has been going lately, the first number that many of us focus on is our account balance. But is your balance higher this month than last because of your trading prowess, or is it because you deposited more cash into your account?By recording all of your deposits and withdrawals as well as your monthly account balance, you will be able to calculate the ratio of your current account balance to your net deposits. If this percentage is greater than 100%, you’ve made money overall. If the percentage is higher now than it was X months ago, then you’ve probably generated profits over that time period. Be careful though… withdrawals can reduce the denominator in your equation and thus increase the result. Similarly, deposits can reduce the result. If your deposits and withdrawals are small compared to your overall account size, this probably won’t have a major effect, but it’s something to be aware of. - Evaluate Your Strategies.
We all know that following a set of quantified trading rules helps provide consistency in our results. Unfortunately, most of us have also experienced a time when some of those strategies become less productive, or even downright unprofitable.If you’re trading with a strict set of rules, it doesn’t really make sense to judge the performance of those rules by letting your gut tell you when “things don’t seem to be working”. Instead, record the name of the strategy with each and every trade you make. That way, you can evaluate the strategy over any relevant time period, and compare the recent performance to longer-term metrics. This, in turn, will allow you to objectively determine whether it might be time to put a strategy aside for awhile. - Quantify Your Discretionary Decisions.
How many times have you decided to “bend” your strategy rules a bit? Does adding an element of discretion help or hurt your overall results? It’s human nature to remember the times when breaking the rules was wildly profitable for us, and to conveniently forget all the times that it was not.By adding a comment field (and possibly a data column as well) to your trading log, you can keep track of when you executed your quantified rules to perfection, and when you did not. You may be surprised to find that all of those “clever” decisions to override the rules were not actually as beneficial as you had thought or hoped. On the flip side, you might discover that every time you add a particular entry or exit filter to your rules, the trade works out better than when you don’t use that filter. - Appraise Advisory Services.
For every investment vehicle in existence, there are services available to tell you what to buy and when to buy it. From Forex day trades to weekly options to monthly stock picks to multi-year buy-and-hold strategies on precious metals, there is someone available to “help” you… for a fee. The problem is, most of them seem to be a testament to the standard disclaimer that “past performance does not guarantee future results”, because somehow your real account containing your hard-earned cash never seems to grow by the same leaps and bounds as the model portfolio shown on their web site!Assign an “idea source” for every trade you make, whether that source is your own research, a trade alert from a paid service, or an informal recommendation from a friend, newsletter or other publication. That way you’ll have hard data to help you decide whether or not to renew your subscription to XYZ Wealth Advisory, or continue spending time every week reading ABC Market Insights.
As with everything we do at Connors Research, we believe that the more you are able to quantify your results, the better data you will have for making decisions about how to proceed. Start simple. Start small. But start today. You may be surprised by where the data leads you.