How And Why To Keep A Trading Journal
One of the first things I did
in high school as I was just beginning my trading career was to try and find
every single great trader and master that I could find. Next, I did everything I could to study what made them a great trader. What characteristics did they share with one another? I began to notice that in looking for great traders there were two types
— meteors — those traders who had spectacular returns for one, three, even
five years; and fixed stars — those traders who had consistently excellent
returns for the risk they took for a decade or more. I tried always to separate these two groups to see what their differences
were. After many years, I saw
literally hundreds of meteors drop from the sky and either exit the markets
wiped-out or turn their great short-term gains into less-than-spectacular
long-term risk/reward performance.
There were a few things that
virtually every fixed star did — and I later noticed that a core group of
shared characteristics were great screens for determining if a meteor was just a
meteor or a budding fixed star. One
of the most critical elements of trading shared by nearly every great fixed-star
trader I studied was one form or another of a trading journal. Indeed some historically great traders, like Bernard Baruch, for
instance, singled a trading journal out as one of the most important tools. Other great traders, like Bill O’Neil, even sell annual reviews of the
great trades and great stocks of the past year.
Two important things that a trading journal does for a trader is to get
him to better understand the markets in retrospect and to get a trader to
better understand his own strengths and weaknesses.
In my opinion, these are two of the most critical things that a trader
needs to do — making a trading journal a MUST for all serious traders. And just as critical as the journal itself is a consistent and periodic
review of that journal — for this is where real insight, both into the markets
and into one’s self, derive.
Think of a trading journal as a
“Dear diary” of all your innermost trading thoughts, actions, emotions and
analyses. It is your
scrapbook and monitoring of the market, as well as a thorough detailed
description of your trading actions and the thoughts, rules, analysis and
reasons for every action you take in your trading. DO NOT SHARE YOUR JOURNAL WITH ANYONE — IT IS FOR YOUR BENEFIT ALONE
UNLESS YOU ARE TRADING WITH OR FOR SOMEONE ELSE!
Let’s look carefully at the
scrapbook component of a journal. This
is your daily brainstorming and gathering of any information that might impact
your investing. Every day I scan
Investor’s Business Daily and cut out the article on market timing, as well as
the list of leading and lagging industries in the New High and New Low list. I also cut out any article that I think might be helpful to my trading. I do the same thing with a large body of different services that I read. Weekly with
Barron’s; monthly
with Forbes; and the same with any other
periodical or newsletter or service that you find valuable.
But most of your scrapbook should be made up of printouts of charts —
charts that show technically significant events by groups or sectors or funds,
or individual stocks (breakouts of head-and-shoulders or cup-and-handle or
flags; breakdowns of the mirror opposite; volume thrusts of the broad market
indexes; follow-through days, and down days on higher volume).yes”>
Also, every day write out your gut opinion. Is the market headed substantially higher or lower? Why do you think so? What
would change your opinion? More
importantly, what are the leading groups and how are they performing
technically? A thorough daily analysis of new highs and new lows and the breadth of
different groups that make these lists should yield substantial fruit in this
regard. Are leading groups starting
to change direction? Are lagging
groups starting to reverse? By
following all these and voraciously pursuing the technical picture daily, you
will have an incredible tool to look back on to give you phenomenal insight to
the markets and how they behave.
A journal also needs to be a
detailed description of your thoughts and actions. Every trade should have a printout of the chart as you make the trade,
and at each and every change in protective stops, and at every change in
decision point up to the point of exit. Like
a before-and-after picture of your every decision.
Why did you allocate what you did to each trade?
Why did you choose that protective stop? Why did you enter the trade? Did
it meet all of your criteria? Are
your criteria written out as clear rules to follow for every trade? Why did you trail the stop where you did?
Why did you exit when you did? How
is your percentage reliability of trades over time? Does it fluctuate? If so,
why? What do you think about each
trade as you make it? Are you most
nervous about your best trades? Does
your gut tell you anything consistently? Which
trades worked the best and worst? Were
there any common elements? Are
there screens you notice that would have focused your trading more in the best
trades? Are there screens you’re
using that prevented you from taking some great trades consistently? Are you making the types of returns that were your goal in terms of risk-and-reward?
Why or why not? This is a painstaking analysis of everything you do in every element of
it.
A full-time professional trader
should spend AT LEAST ONE HOUR A DAY on his journal, and probably more like two
hours. A serious intermediate-term
trader should spend at least two hours a week or more on his journal. Review your journal every 30-60 trades or every quarter, whichever comes
first. Less trading can allow semi-annual review. Few tools
will help a trader more.