Thursday, November 09, 2006

Trading Journal

I trade not only to make money, which is the first goal, but also to learn about myself. Trading gives us lessons not only about what to do or not to do next time in a trade, but also Life Lessons about personality traits that could improve the rest of our lives too - IF we are willing to work on them. Like all habits we form, change takes time, and we must commit to improving one element of our trading personality at a time, with total focus. Journaling can help identify goals and issues, as well as track progress.

What does your Trading Journal look like - or do you not have one? It is critical to keep a Trading Journal. Yet statistics show that 97% of people do not have written goals, so why would a written journal be much different? In my journal I ask myself every day "Did I execute my trading plan properly?" If I did execute my plan correctly but I lost money, I give my trading that day a Plus. If I did not execute my plan, even if I made money, I give my trading a Minus. I also ask what caused me not to execute my plan. Was it lack of confidence in the system, fear, distractions, or something else? I then write out a positive solution regarding how I can fix this in the future. I also write down if I override any of my rules. I have generally found that my ego-based decisions to tinker with my system added little value, and often hurt more than it helps. The ego wants to feel like it is adding value on top of the system, to make the trader feel important. I believe that trading for ego satisfaction is probably even more damaging than trading for entertainment or excitement, as the ego risks getting damaged by the financial fallout that can occur.

In my Trading Journal, I also note any insights on the current market, patterns that are working or not working, and other issues I encountered. I also list in my records my thoughts, feelings, ideas for improvement, strategies that did or did not work, etc. Reviewing your entries and exits in a trading journal helps you identify your strengths and weaknesses.

In my Trading Journal I like to go back and look at my trades over the last month, to see how they subsequently performed. If I sold too soon, I want to find out why. Besides the daily observations, I commit to doing a post-trade analysis every month at the end of each month. I note what I did right and wrong, and seek to learn from mistakes to minimize future errors in similar circumstances, while also looking for winning patterns where I seek to repeat big successes. I call this a Success Profile. Be honest, and ask good questions: "What worked? What will I do differently next time?" Write about your thoughts, feelings and behaviors to see if you can spot patterns. Also keep notes on your trades you liked but didn't make. What held you back? Do you notice any patterns there that are causing you to miss opportunities? Look for patterns among your non-trades too to see what you are missing.

One of the daily notes I like to make is to ask myself, "How Do I Feel Today"? In three primary categories: Physical, Emotional and Spiritual. I grade myself from 1 to 10, with 10 being best, and I write a note to myself about why I feel positive or negative in each category. There is no science in this case, but more of a personal 'gut' sense of where my mind, heart and soul are at on a given morning. Not surprisingly, some of my best days have correlated with scores of 26 or better, while I find that any total score under 24 is not very conducive to sharp, focused trading. The key if you score yourself low in an area is to then ask "Why?" and "What can I do to feel better now?" In some cases, if I feel sluggish physically, I have been known to get out of my chair and do jumping jacks and push-ups. This may sound silly to traders used to sitting for long periods, but I prefer to boost my self-esteem by even marginal exercise if I need it to feel better about myself, in additional to any physical benefits. Both positive and negative emotions seem to translate into trading. I will journal to improve how I feel about an emotional issue, and if I feel spiritually malnourished, I will take time to pray and meditate. The bottom line is that whatever gets you feeling better about yourself will tend to make you a more confident and focused trader and investor.

Good day and good trading.