Psychology Making Trading Journals Work for You

In my last article, I covered some of the pitfalls of trading journals. In this piece I'd like to cover some of the features of trading journals that I have found helpful in my work with new and experienced professional traders. My goal as a trading psychologist is to do all that I can to accelerate traders' learning curves. Sometimes this means helping traders with emotional problems, but just as often such problems are the result of trading difficulties and not their cause. A journal, properly constructed, is a powerful tool for learning - and relearning - markets and cultivating exemplary trading behaviors. Here are some of the principals that have guided my journal-based work with traders:

1. Make journals a part of the daily routine - Even if you don't trade on a particular day, it is valuable to review the day's setups and behavior at key price levels. Reviewing patterns on different time frames can also help traders internalize the context of the markets they are trading, as well as the interrelationships among those markets. The French scientist Louis Pasteur observed that, in matters of observation, "chance only favors prepared minds". Replaying market days, reviewing your own performance, and identifying missed opportunities prepares you for future performance, as your increasing familiarity with trading patterns sensitizes you to them in real time.
   
2. Incorporate specifics in your journals - If I had to identify the single most common shortcoming among trading journals, it would be their absence of detail. Entries such as, "I lost my discipline; I have to be more patient," might be nice as post-it reminders, but are inadequate as journal entries. Journals need to clearly state what happened, your assessment of why it happened, and the specific steps you intend to take to deal with the situation in the future. A good rule is that anyone reading your journal should be able to identify and follow the exact same steps that you intend to take in the future. Your journal should be a planning document, not a statement of intentions.
   
3. Wherever possible, review your journal entries with a valued colleague or mentor - When I established a training program for new traders, one of my first steps was to insist upon daily review of trading journals. This required me to create a trusting and constructive environment, so that traders would be honest in their entries. Once that openness developed, the daily reviews became proactive planning sessions (usually shortly before the start of the trading day) that addressed issues before they could damage the profit/loss statement. Even more important, the daily review created expectations of accountability, as traders knew that my inevitable question would be, "How did you do with your goals for the day"?
   
4. Use journals to review positive trading performance, as well as problems - The number two shortcoming among journals is their focus on problems to the exclusion of solutions. If journals become a mere recounting of one's flaws and inadequacies, traders will inevitably lose interest in them. Traders can learn as much from what they do right as from their errors. My favorite instruction to new traders is to highlight in their journals one thing that they did right the previous day that they want to replicate today and one thing that they could improve upon in today's trading. This forces traders to stay in touch with their strengths, as well as their failings.
   
5. Each journal entry should include material about the markets and material about the trader - It is not unusual for traders to emphasize one at the expense of the other. The core concept I stress with traders is that of pattern recognition. Traders display patterns in their behaviors: some of these are positive; others interfere with profitability. Markets enact their patterns as well; it is the trader who can see these as they emerge and act quickly that has the best chance of long-term success. Including material about trading patterns and traders' patterns makes the journal a learning tool about oneself and the markets.
   

The best trading journals I have observed have been ones that are creative and rigorous. Here are the two most important steps I believe you could take to turbocharge your journal:

1. Make it a multimedia project - Writing a journal in diary form is good, incorporating annotated charts is better, but including video is best of all. Programs such as e-Signal allow you to take screen captures of the market at any time of the trading day and also allow you to replay market days and review their unfolding. Better yet are desktop video programs such as Camtasia (www.techsmith.com) that create highly compressed video files of your desktop activity. This allows you to capture the day's trade in its entirety, which you can then annotate by adding a voice track. Ninety percent of pattern recognition is repetition: seeing enough variants that you become sensitive to essential and inessential features. While static charts are better than nothing, they do not capture the unfolding of patterns: the very thing that traders need to be able to recognize and act upon. Videos provide the opportunity to see patterns over and over again, accelerating the recognition process. Multimedia journals also actively engage the trader and allow traders to process markets via multiple modalities (images, sound, text, etc.). Educational research tells us that learning is most likely to occur when learners are actively involved in the acquisition of knowledge and skills. An engaging, multimodal journal is apt to be a better learning vehicle than a dry diary.
   
2. Incorporate metrics - I could write a book on this topic. It is absolutely amazing how much more traders can get from their journals if they include basic statistics about their performance. Trading tendencies that escape normal notice suddenly stand out when summarized statistically. Areas for work and areas of improvement also stand out. With statistics, we can not only say that a trader made improvement, but can actually measure that improvement and track it over time. Such statistics capture improvements that will eventually show up in the profit/loss statement, but which may not be immediately evident.
   

Here are my favorite trading metrics for active traders:

• Number of winning, losing, and scratched trades;
  
• The average size of winning and losing trades;
  
• The average holding time per trade, and the average holding time broken down by winning, losing, and scratched trades;
  
• The number of winning, losing, and scratched trades broken down by long and short positions;
  
• The number of winning, losing, and scratched trades broken down by time of day;
  
• The average holding time per trade for long and short positions and broken down by time of day;
  
• The number of winning, losing, and scratched trades for days categorized as uptrending, downtrending, and neutral;
  
• Daily profit/loss, also broken down for days categorized as uptrending, downtrending, and neutral;
  
• The sequences of winning and losing trades during a day and from day to day;
  
• The largest winning and losing trades during a day and during a week;
  
• The largest winning and losing days during a week and during a month.
  

Less frequent traders can keep these statistics manually. Very active traders will benefit from programs that automatically capture trade data and summarize performance, such as Trader DNA (www.traderdna.com). The data provide very helpful benchmarks that allow traders to diagnose problems and track improvement.

Here are a few of the areas for improvement that commonly emerge from statistical analyses of performance:

• Holding onto losing trades as long or longer than winners;
  
• Trading with a persistent long or short bias that is not supported by market trends;
  
• Significantly different profitability during morning vs. afternoon trading hours;
  
• The tendency to have strings of winning and losing trades;
  
• Significantly different profitability during different market conditions, such as trending markets or volatile ones;
  
• The tendency to give back the results of many profitable trades in a few large losing ones.
  

When you combine rigorous metrics with a multimedia journal, the result is the kind of ongoing quality improvement process that typifies the finest business organizations. The best trading journals are technologies for learning and self-improvement. This takes time, effort, and creativity, but the results are worth the investment.

 

[Rhody Trader]

This is a follow-up to Brett Steenbarger's recent article on trading journals.

 

[clylbw]

Many thanks; I have been waiting for this.

 

[steenbab]

Thanks for the opportunity to be part of the forum. For those interested in pursuing the topic further, there are articles on my free website (www.brettsteenbarger.com) re: trading journals. Also, the blog on my site has registration information for my free webinar with the Chicago Board of Trade on Wed. 9/28/05 after the NY market close. In that webinar, I will present some material relevant to trader metrics, as well as some original research. I'll be asking the web host to archive the presentation for folks unable to attend live -- Brett Steenbarger

 

[rdstagg]

This is one of the best articles I have ever read - great!

 

[RUDEBOY]

This article was straight out of a Christmas cracker! COME ON! Let me think of the situation! Derek's log. 24.05.02. Had an arguement today with my mistress. Didn't want to come onto the floor today, but had to. Big margin. The stomach ulcer is giving me jip again. I don't think i can carry on with this. I should be working with my mate Ste in advertising. I honestly just can't hack it anymore. Why am i doing it? After a loss day, would you want a realistic journal? Is life a smooth ride full of laughter and joy? DEAL WITH IT OR GET OUT. Sugar coating is for fairies. SINCERELY. RUDEBOY.

 

[commanderco]

I do not keep a journal, simply because I have decided not to.
I never kept one in my business, in my sport, at the gym, because I am not a journal kind of guy.
However, I do write a list for myself each night.
It is not written in the "do this, do that" style, but rather written in a style that ensures that I will be in a positive frame of mind after I have read it in the morning.
I trade the CME EC mainly, and I take several small bites at it each day, my limit is 40pts or 3 hours. Seldom am I there at the 3 hour mark.
I do not have losing days let alone losing weeks because of the way in which I trade.
Therefore I never put myself in the heroic stance of the"come back kid" I did all that when I was younger.
My attitude is "never take your eye off the ball" If your attention span is 3 hours then that is your trading day.
"Know thy self" is the best advise I can give to a new Trader and never ever do anything that will errode your confidence.
Let volume be your friend.
Find a way of trading a highly liquid ,point by point market and let the number of lots traded do the real work.
Which brings me back to journals .... its your life, you do what you want, but make certain it works in a positive manner.

 

[SOCRATES]

Journals do not assume personal responsibility or self governance of the highest order, they just provide excuses, except if they are used as checklists to correct areas of imperfection.[/color]

 

[Keystone]

This article was straight out of a Christmas cracker! COME ON! Let me think of the situation! Derek's log. 24.05.02. Had an arguement today with my mistress. Didn't want to come onto the floor today, but had to. Big margin. The stomach ulcer is giving me jip again. I don't think i can carry on with this. I should be working with my mate Ste in advertising. I honestly just can't hack it anymore. Why am i doing it? After a loss day, would you want a realistic journal? Is life a smooth ride full of laughter and joy? DEAL WITH IT OR GET OUT. Sugar coating is for fairies. SINCERELY. RUDEBOY.

Very funny, but have you read his article. I don’t think so as that type of journal is exactly what he IS saying is a complete waste of time.

One of the biggest faults in a traders evolution is that they do not analyse their actions. They bumble along from one thing to the next, lost in the woods, with no idea what they did today or what they must improve on for tomorrow. There is too much knowledge required when starting trading that is impossible to keep it all within ones head, never mind trying to analyse it all together with our decisions and actions. I can’t stand journals and it took me years before I realised that I must be completely honest with myself and the only way to do that was by having the discipline to write things down. Even then it took a while before I fully realised what format a useful trading journal should take and I wish I had this article to read back then as it would have saved me a great amount of time and frustration.

Digest this article and then adapt it to your own style of trading rules and then let it adapt organically as you develop. However Socrates is right when he says they should only be used as a checklist to correct areas of imperfection. We are most natural at deceiving ourselves therefore we must be find ways to disprove our results.

I have chosen to write this as I have found Mr Steenbarger’s articles on his website very interesting and I have been able to adapt his wise words to helping my own style of trading.

Keystone.

 

[barjon]

I know we all like a bit of happy banter on the boards, but it is important that comments in relation to Knowledge Lab articles keep strictly to topic since they form part of an ongoing archive. I am therefore embarking on some pretty heavy housekeeping and I hope participitants will excuse me for apparent heavy-handedness. Thanks

jon

 

[SOCRATES]

In my post number 8 , above I point out how it is that journals can be used constructively if they are used as checklists to correct areas of imperfection. For this to work, the individual must have a very high level of self awareness and trading proficiency already and be able to self criticise effectively.

Not everyone has a very high level of self awareness and a very high level of trading proficiency.

The implication rests that the individual is responsible for the imperfection imposed upon him. But the tragedy is that the individual, who may be doing his best, is not aware of the underlying reason for his malfunction, for reasons beyond his remit.

I am curious to know how it is that imperfections are dealt with and solved by psychologists when they are appointed to render support to people who have very severe problems as a consequence of being victims in this regard.

 

[frugi]

The implication rests that the individual is responsible for the imperfection imposed upon him. But the tragedy is that the individual, who may be doing his best, is not aware of the underlying reason for his malfunction, for reasons beyond his remit.

I am curious to know how it is that imperfections are dealt with and solved by psychologists when they are appointed to render support to people who have very severe problems as a consequence of being victims in this regard.

Indeed the subconscious often seems to harbour imperfections that are self-destructive, while allowing (even forcing?) us to consciously rationalise them or simply be all but unaware of their existence. Though this self-preservation mechanism may have served us well in the past, it would now seem to lack the relevant filters to cope with the novelty of mankind's parabolic progress.

I believe that skilled NLP (neuro-linguistic programming) practitioners are able literally to effect a physical change in chemistry and neural navigation in certain parts of the brain, in order to remove, for instance, destructive neurotic behaviour (such as not taking losses, smoking, alcoholism, x- or y-phobia etc.) and that this change is branded so deep in the hardware that after treatment the need to consciously avoid these urges is completely removed. This seems entirely credible - though amazing - to me, albeit the little we know of the relationship between the conscious reality of our thoughts and the distrubingly mechanical chemical/energy background that creates and allows them. I've no idea how it's done, but I'd not deny the possibilty; I'm no fan of pseudoscience either. Subjects who have failed to respond to any number of other "treatments", such as hypnotism, self-questioning, willpower etc. are often amazed by the results of NLP, so I'm told. Not that I've tried it myself, but am seriously considering it, if only out of curiosity.

 

[badtrader]

NLP falls under the broadest heading of popular psychology, and perhaps most closely relates to congnitive psychology., NLP began quite outside the academic mainstream, and it remains largely divorced from mainstream academic psychology to this day, even though many NLP practitioners do have traditional credentials in psychology and psychiatry. NLP is not so much about discovering what is true as it is about discovering what is useful, what works in a given situation. But beyond mere utility, NLP aims for efficiency and elegance

 

[SOCRATES]

Frugi and badtrader, I am very well aware of NLP, thank you. But it is not exactly what I had in mind. This is because when many traders fail, the cause of the failure is attributed to psychological problems. This puts the onus on the victim. I would be interested to hear from the horse's mouth, how it is that resident psychologists go about turning hopeless traders into good ones and better ones into stars, and the reasons why they believe that what they can say is capable of solving the problem.

 

[commanderco]

"clear thinking" that oh so elusive little beast. It is the only thing that separates a profitable Trader from a Contributor.

Some people have it to a greater or lesser degree and have the capacity to hone and polish it.
This does not necessarily make them popular with their peers and so it is a skill that is better left to shine rather than be paraded.

Other people will never clear their minds sufficently to trade profitably and should leave the markets alone. But this is something that they must experience for themselves ... and there will be a reason (excuse) why they have stopped trading and it will not be their fault.

Mostly, in my experience a Trader who is gunshy and therefore feels that they have reached some sort of psychological barrier, has insufficent faith in their trading system and methods.
And with good reason.
Their trading system and methods are rubbish and doomed to make them a Contributor.
Forget trend, forget time frames, forget over optimisation. It is an absence of "clear thinking" that will be their ruin.

In answer to the question "Can you make a profitable Trader out of a steady Contributor"
NO. ...Not today, not tomorrow, not anytime, not ever!
But there is a good living to be made in convincing people that you can.

 

[chump]

Commanderco,
I wouldn't disagree with you on most points ,but when you say "Can you make a profitable Trader out of a steady Contributor" I think you are making a statement that is too sweeping...there are other chracteristics that come into play...have you read Gary Smith "how I trade for a living" ..there's a steady contributor for 19 years who finally saw the light and broke through and as far I am aware has been successful in some 20 years since...correct me anyone if the current status on him is different to that.
I won't go into the 'other characteristics' I mentioned because they really belong on the psychology thread , but I cite one example as to why I think your statement was too sweeping.

 

[SOCRATES]

"clear thinking" that oh so elusive little beast. It is the only thing that separates a profitable Trader from a Contributor.

Some people have it to a greater or lesser degree and have the capacity to hone and polish it.
This does not necessarily make them popular with their peers and so it is a skill that is better left to shine rather than be paraded.

Other people will never clear their minds sufficently to trade profitably and should leave the markets alone. But this is something that they must experience for themselves ... and there will be a reason (excuse) why they have stopped trading and it will not be their fault.

Mostly, in my experience a Trader who is gunshy and therefore feels that they have reached some sort of psychological barrier, has insufficent faith in their trading system and methods.
And with good reason.
Their trading system and methods are rubbish and doomed to make them a Contributor.
Forget trend, forget time frames, forget over optimisation. It is an absence of "clear thinking" that will be their ruin.

In answer to the question "Can you make a profitable Trader out of a steady Contributor"
NO. ...Not today, not tomorrow, not anytime, not ever!
But there is a good living to be made in convincing people that you can.

You are right but additionally the question should be "Can a psychologist make a profitable Trader out of anyone ?".

 

[commanderco]

Commanderco,
I wouldn't disagree with you on most points ,but when you say "Can you make a profitable Trader out of a steady Contributor" I think you are making a statement that is too sweeping...there are other chracteristics that come into play...have you read Gary Smith "how I trade for a living" ..there's a steady contributor for 19 years who finally saw the light and broke through and as far I am aware has been successful in some 20 years since...correct me anyone if the current status on him is different to that.
I won't go into the 'other characteristics' I mentioned because they really belong on the psychology thread , but I cite one example as to why I think your statement was too sweeping.

Hi Chump,
I am just passing on my thoughts, if they appear "too sweeping", then they appear "too sweeping"

I cannot comment on a Trader who took 19 years to become profitable, it is beyond my scope. I tend to take stock of things well before 19 years have passed. In fact 19 months is a long time to travel in a circle in my opinion.

I say this because I am a Kiwi living in beautiful Buenos Aires with my Wife, for the past 18 months. When people ask why we are here, it is because we enjoy the experience in this moment.
Our wonderful 14 year old Labrador passed away a few years ago and we will get another next year when I turn 60.
I only have 3 more dogs left in me and I will be 88 when the last one will be a puppy.
For those of you who have experienced a Lab puppy, you know that you need to be prepared for the delightful experience.

Anyway, my point is ... I do not have 19 years to spend lost in a learning circle.

For those people who feel that they are, then my suggestion is try winding your way out of it through a spiral so that you do not pass over the same ground day after day.
But I digress, back to trading!
Very basically, if the price is rising in your elected time frame, then you need to be long.
If it is falling, then you need to be short.
The only time that the market is dangerous is when you have taken a position. Therefore, buy and sell into bursts and then exit. Never let a profitable postion turn negative and do not let your imagination tell you that an unprofitable position will turn in your direction shortly.
All this will reduce your exposure to a minimum.

The markets are neither cruel or generous, they simply go up and down as buyers/sellers agree to settle at more or less. However, if your head is full of cottonwool then the whole thing is similar to trying to shoot a duck from the bow of a pitching ship with a single shot 22.
The duck is moving, the ship is moving, your rifle is moving, and you do not believe that you can do it. In short, your chances are hopeless.
However, if you stabilise a couple of factors, the odds greatly swing in your direction and no longer favour the duck.
The above ramblings are purely my thoughts
Goodluck

 

[commanderco]

You are right but additionally the question should be "Can a psychologist make a profitable Trader out of anyone ?".

I do not believe that the odds favour the Psychologist, if the person has already failed to become profitable after a reasonable period of time and effort.

In fact in many cases, the odds are monumentally against the Psychologist and the question then becomes "why bother trying" when the person is clearly better suited to something else.

 

[Keystone]

Guys,
This is all very interesting but debatable in another arena. What was this thread about again?!
Chump… I agree with your beliefs.

But can we all keep our gobs shut until Socs has his question answered?