One of the most common pieces of advice trading mentors give to their students is the keeping of a trading journal. By documenting your trading, the common wisdom holds, you can learn what you?re doing right and wrong and speed your learning curve. I happen to be quite a fan of trading journals; indeed, I made journals a mandatory part of the training program at a Chicago-based proprietary trading firm. All too many times, however, I found that the journals did not accomplish their purpose. They became rote exercises that did not get to the heart of either trading problems or solutions. So I thought in this article I?d outline the five most frequent shortcomings with journals and how these can be addressed.
- The journal lacks specifics. Many times the journal becomes an outlet for the trader, a way of venting. While there is nothing wrong with venting per se, it is hard to see how *simply* venting in a journal can improve performance. A common entry might state, ?I overtraded a slow market and broke all my rules. I know I have to take what the market gives me. Tomorrow I need to trade with more discipline?. All these things may be true, but the entry lacks specifics regarding *why* the trader overtraded; *how* the overtrading will be avoided in tomorrow?s trade; and *what steps* will be taken to return to the discipline. A journal entry that lacks specifics is a statement of good intentions; not a plan. If your journal entry does not include concrete steps that you can follow to address a problem situation, it is unlikely that it will serve as an action guide.
- The journal emphasizes problems, not solutions. Traders love to keep journals when they?re losing and then fall off the journaling bandwagon when they?re making money. I would argue that, when you?re making money, that?s the *best* time to keep a journal. Your goal should be to replicate successful trading patterns, not simply analyze problematic ones. The ideal journals isolate what traders do when they?re trading their best, so that these solution patterns can be isolated and mentally rehearsed as part of a learning process. At their worst, journals are like bad parents who chastise their children when they?re doing something wrong, but never offer attention and praise for good behavior. Kids learn to resent such parents, and traders learn to resent problem-focused journaling.
- The journal talks too much about the trader and not enough about the markets. Journals are a learning tool, and your ultimate goal is to learn how to trade. By focusing exclusively on your state of mind, what you did or didn?t do in the trade, etc., you lose the opportunity to identify and learn patterns that appear in the market. It?s extremely helpful to review a market day and examine what you could have noticed to alert you to a market move. Perhaps oil made a breakout move preceding a break in the equity indices; perhaps a move in the currency markets could have given you an early read on how the market would respond to Fed news. By retrospectively identifying such trading patterns, you train your mind to look for them the next time they appear.
- The journal is reactive, not proactive. This is part of the venting phenomenon: traders will make journal entries after the market day, but rarely use the journal to actively prepare for the coming day?s trade. An ideal journal captures what you?ll be looking for in the coming day in the markets (anticipated setups) and what you?ll be working on in your own trading. Think of your trading as a business and your journal as your business plan for the day. A business plan should reflect your strengths and weaknesses and identify areas of opportunity. A business plan should also detail how you will exploit that opportunity. Learning from past performance is important, but if the learning is not reflected in future plans, it will not be reflected in actual trading outcomes.
- The journal lacks metrics. This is perhaps the topic I am most passionate about. I have found that traders can best assess their strengths and weaknesses by keeping detailed records of their trades and by evaluating themselves across a series of performance measures. I cannot tell you how many traders I?ve encountered who don?t have the faintest notion of their average profit per trade; their average win size and loss size; their average holding period per trade; etc. It?s not that the traders don?t care about performance; it?s that they have not drilled down to the trade-by-trade level to see what they?re actually doing in the markets. Many times, traders *think* they?re trading one way, only to find out when they look at the data that they?re not trading that way at all. It?s hard to see how a trader can identify if they?re having problems trading in the morning vs. afternoon; if they?re more often right on the long side than short; or if they are trading large size differently than smaller size if the statistics are not there to be analyzed.
So what?s a trader to do? The first step is to decide whether or not you really *want* to know what you?re doing and how well you?re doing it; whether you want to put in the time and effort to identify the patterns in each trading day?the market?s and your own. To paraphrase U.S. college basketball coach Bobby Knight, many traders want to trade and many want to win, but not many are willing to put in the work it takes to be a winner. While Coach Knight has earned his share of criticism, look at the pure effort he puts into preparation for a coming game. The same intensity of effort can be found in Tour de France leaders Lance Armstrong, Ivan Basso, and Jan Ullrich, as they actively train, plan, and rehearse for each stage of the race. This is the effort required of a winner, and each trader needs to know if he or she has the fire in their belly to sustain such work.
Ultimately, the effort to win is sustained by a desire to know. Excellent traders are always keeping score: they want to know what they?ve done right or wrong, and what?s making and losing them money. They are always working on themselves and their trading. I?ve met far too many ?breakeven? traders who, upon inspection, have been losing money consistently. It?s not that they?re lying; they simply don?t want to know the truth. Thus, they avoid it. It is simply too painful to look at the money and opportunities lost. Keeping a journal *should* be painful at times, but it should also bring out the best in you. Without it, you?re likely to be a business without a plan.
In my next article, we?ll look at the specific data and metrics you can include in your trading journal and how you can move from simple journaling to active planning.