Saturday, August 20, 2016

Trading Journal: The Must Have Tool For A Trader-From A Case Study Perspective

A very close friend of mine who is also a day trader shared some very interesting insights about his trading career journey. I am presenting his story for the readers to go through. I have personified my friend in the article as if he is writing the post.

The all in one most indispensable tool which fortunately I was able to find was the most potent one and that is my trading journal, in the form of a trading journal spreadsheet which I started maintaining after very stressful initial years. These initial years before the inclusion of trading journal in my arsenal were the most scrambling years of my trading profession. Now not even a single day I can think about going for live trading without this vital resource.

My Trading life before embracing Stock Trading Journal

I started my career as a day trader almost in an identically similar fashion to the well-known stories of many struggling day traders. I treaded into the trading arena with a satisfactory capital which could be intelligently utilized for achieving a successful trading career. My story started with lady luck on my side for a couple of months. I invested in some companies and within few days of my investment the result for general elections to Lok Sabha [Indian Parliament] was out leading to an upper circuit at National Stock Exchange and after that everyone knows that the stocks were floating in the skies.

My capital grew within a short period of time and I was filled with an inner feeling of a champion. This took the fear out of me and I was roaring to go into the intraday trading arena without realizing the formidable reality that day trading is one of the most difficult professions on earth.

Sooner than later the reality dawned on me and I was consistently making faulty decisions in taking the trades. It was just a matter of time that my capital depleted and I was wondering how nothing is going right for me. I stopped intraday trading for a while, started searching for trading systems, studied technical analysis from various perspectives, chalked out a couple of intraday trading strategies and replenished my capital account for the second innings.

I started trading again, this time with improved results but some very visible deficiencies. By and large either I won the trade or lost it I was reeling under the psych of frustration, failure and low self-esteem. The reason behind this was that I knew the results ought to be much better but I was unable to perform satisfactorily.

I read a quote which goes like “SURVIVAL is better than failure and it should be your first goal as a newbie trader.”

These circumstances gave me the clue that there is something very important which I am missing. Fortunately with all my emotions going haywire I was sure that it has something to do with trading psychology and my search for getting an answer began from here.

Journey towards the Enlightenment: In other words preparing the trading journal

I started searching for resources very carefully and thoughtfully so that I don’t waste a lot of time on unnecessary chores. As I was clear about the trading psychology angle I was determined to find something very authentic related to that.

Fortunately the good thing happened and I was able to get hands on a book namely Enhancing Trader Performance - Proven Strategies from the Cutting Edge of Trading Psychology written by Dr Brett Steenbarger. This book brought a revolution in my thoughts.

The blog written by Dr. Brett Steenbarger which is Trader Feed is also a very good resource for enhancing ones trading knowledge.

As the saying goes that practice makes perfect, Dr Brett Steenbarger improved on that and said that it is perfect practice that makes perfect. Dr Steenbarger mentions about K. Anders Ericsson, perhaps the most prolific researcher in the field of performance.

K. Anders Ericsson gives an example of young Michael Jordan who doesn’t accept defeat lightly, and he uses losses to drive himself forward, this is the characteristic of elite performers. For this very quality Ericsson has coined the term “deliberate practice” and assigned it as the cornerstone of expertise because it multiplies experience.

The idea behind this deliberate practice in perspective of trading is that a trader should recognize the flaw in his strategy and make a deliberation to sideline that weakness forever. Repeat this for each and every flaw in the trading strategy until and unless one gets over all of them.

So the best idea is:

  • What you determine that works for you keep doing it.
  • What doesn’t work for you modify it or at the most eliminate it.

For a Trader to achieve this much coveted “deliberate practice”, the weapon is his own trading journal. The importance of trading journal in the words of various experts can be summarized in their own quotations related to trading.

“The only way you get a real education in the market is to invest cash, track your trade, and study your mistakes.” – Jesse Livermore

 “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.” – Brett Steenbarger

“Make a trading journal your first trading habit. It will become the key to all your good trades in the future.” Investopedia

“Your best trading book is your own trading book”- Adam H Grimes

 The foremost attribute which should be present in a trader is discipline. It is not necessary that a person who is disciplined in normal life can also be a disciplined trader. For being a disciplined trader some special efforts are required which are very well underscored by the following quotation:

“A disciplined trader is a profitable trader and keeping a trading journal is the first step to building your discipline.” - Babypips

After going through the book by Dr. Brett Steenbarger and some other resources I was fully convinced that my trading profession was short of the most potent tool and that is the trading journal.

Why trading journal is the most potent tool

I started building up my trading journal in a raw manner. The initial steps were to jot down the trades in handwriting on a paper note book. This activity helped but it was really time consuming. So I thought of taking help of the much useful Excel spreadsheet to bring up a trading journal spreadsheet.

Fortunately as I was preparing it, I got a trading journal spreadsheet  shared by Trader Mike at his blog.

The statistical part of the trading journal spreadsheet comprises of the following columns:

  • Initial Risk: The initial amount at risk while setting up the initial stop.
  • Net Profit: This is the total profit minus losses and other transaction costs.
  • Win percentage: The total number of wins divided by the total number of trades.
  • Loss percentage: The total number of losses divided by the total number of trades.
  • R Multiple: Profit & Loss divided by initial risk. R is the initial risk. This will tell how much one is making in excess of the initial risk.
  • Average trade gain: This is calculated by dividing the total profits from all the winning trades divided by the total number of winning trades.
  • Average trade loss: This is calculated by dividing the total losses from all the losing trades divided by the total number of losing trades.
  • Payoff ratio per trade: Calculated as the average winning trade minus the average losing trade.
  • Profit/Loss of Long only or Short only trades: This tells about what kind of bias one has. It can help in modifying the decision making pattern.
  • Largest number of consecutive losses:  This will help in identifying the maximum drawdown situations. This determines the extent to which one had to face losses sequentially.
  • Average number of consecutive losses: This will convey an overall picture of the performance of losing trades in terms of drawdown.

There are opportunities of adding more columns as per ones analytical expectations but the ones above which I use tell the whole story in short. Any added information can act as a bonus.

If we go into the details of each column separately then each aspect is very wide in scope and can be studied thoroughly for deeper understanding.

In addition to the columns in the spreadsheet I also added a text box for noting down all the points which influenced my decision of taking the trade in the first place and then exiting the trade on the second.

This was necessary as only statistical data will be of little use if I don’t include the emotional factor in making my decisions after all a trader is controlled by the flow of emotions as per the circumstances prevailing during the trade.

The trading journal was missing one more thing and that was the visualization factor which was very fairly supplemented by the screenshots of the charts. I take the screenshots covering the time period of the trade. The entry and exit points are marked on the chart with few technical details regarding the setup and the idea behind entering & exiting the trade. This also acts like the highlights of the live trading session attended at an earlier point of time.

Images speak better than words and I find this practice very useful of keeping the screenshots. I give the name to the images of the screenshots similar to the Serial number and date of the trade in the excel sheet for ease in future reference.

Why did maintaining trading journal regularly helped me?

Now after the tool was in full shape it was on me to fully exploit the tool for performance and deliberate practice. I made a set of questions for myself which were to be answered by me for each and every trade that I executed.

The questions more or less are like this:

  • Can I identify the patterns which work for me?
  • Can I identify those patterns which do not work me?
  • Am I setting up correct stop limits and profit target? The stop should not be too far and neither too close, so what should be the ideal placement?
  • How frequently do I trespass my set up rules and how should this be overcome?
  • What emotions led me to take the trade or exit the trade?
  • Which events in the macroeconomic aspects had an effect on my trading possibilities?
  • In what kind of market conditions I feel more comfortable in remaining a trade?
  • How did I react to the sudden news events which brought volatility factor in the ongoing trade?
  • Which trading sessions of the day I feel more comfortable and which are the ones which make me stand on the toes?
  • How many times I missed trades on a valid setup and what were the factors which played a role in such a scenario?

When I was able to answer these questions in an honest way day after day, I felt a lot more confident in taking the trading decisions. This task helped me to be right more often and thus increasing the odds in my favour. I became more proficient sticking to the trading plan which was not the case in the earlier days of my trading.

My trading journal has given me the opportunity to optimize my orders with correct percentages of stop loss limits and profit target .Now after the proficient use of the trading journal tool I am able to bet bigger on my intraday trading strategies. My efficiency has improved a lot after the use of trading journal as an analysis tool because it has aided me in following the much popular saying in the trading circles that let your profits run and cut your losses short.

My trading journal has given me a lot of respite from the violent emotions which I used to experience every other single trading day .I cannot think of going into a trade the next day without having completed all the details of the trading of the previous day and the expected trading environment for the next day in my trading journal.

Consistent wielding of the trading journal will help to track the performance of the trading strategies and setups in the ever-changing dynamic market environment. We have to change swiftly in tandem to the market so as not to be left behind in the flow of dynamism.

There are few resources which provide online trading journal. You can give it a name as forex trading journal, stock trading journal or trading journal software but the main purpose is to track your performance as a trader.

A free online trading journal website is StockTrader

There is another free one which I am updating Trade Bench

There are some other names in the field of trading journal software and online trading journal which are as follows:




Although the above three are paid resources for the users, Stock Tickr has some free basic functionalities, Tradevue gives a plan which is free for 100 trades and Edge Wonk has free trial period. .

No matter what tool one decides to use for improvement,be it a trading journal spreadsheet,online trading journal or trading journal software, the foremost task must be to use it in the most exhaustive manner.

This could aptly be supplemented by the quote from Dr. Steenbarger's book:

"I’m a big believer in starting with high standards and raising them. We make progress only when we push ourselves to the highest level." — Dan Gable

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