Trading is simple and yet it is difficult to do it well. To trade well one must have a good understanding of the market as well as self discipline. And there is nothing better than objective observation to achieve that. The problem is that it is also very difficult to observe objectively as not only do we have expectations, opinions and biases, but we are also constantly bombarded by the opinions of others through the media. However, a trader can objectively analyze their performance through a formal documentation and analysis framework.
The analysis framework that I use has three main components:
- A thought journal.
- A market journal
- A detail trade statistics tool
In the thought journal I document all emotions, situations or biases that have no connection with market conditions. This is where the I write in detail what I experience when I have a large loss or win, especially if it was a traumatic experience.
The market journal is where I write all I observe in the market that might give me an edge like failed patterns or indicators that are “working well.” I also enter all trade transactions. This is very important to be able to generate statistics about my own trading. For each trade I write:
- Date of each transaction (open, close, scale in or out)
- Symbol
- Quantity
- Price per share
- Long or Short
- Buy or Sell (Open or Close positions as well as scaling in and out of trades)
- Commissions and other costs
- Setup type (Trades are tagged by setup pattern like “Head and Shoulders”, or “Cup and Handle”)
- Stop price
- Target price
- Overall market direction
- If I was stopped out of the trade.
- Any relevant comments to that particular trade (both thoughts and market observations )
Every week I add and average all trade data as well as classify and group trades by their setup tags. For all trades I then calculate expectancy and rank each trade to see what trade produced the highest gain and loss and calculate their ratios. Then I do the same for trades that fall within each setup tag to see which are working or not. I also do the same with data gathered year to date, monrhly, quarterly and semi annually to see longer term trends in my own trading.
Every couple of weeks I go through all the information I gathered. I read all entries in the journal and expand on those thoughts and observations by looking at the charts with up to date data. I look at my trading stats and see if any patterns are emerging like setups that have been working well or if I had a large number of setups failing. The setup success rate is in itself a great market indicator. For example, if breakout patterns are failing I take a step back and look for other signs that the market is slowing down and possibly changing direction.
It is a lot of work, but it does pay off. For years I used Excel spread sheets that I set up with macros to generate graphs and stats, but it was difficult to search and manage. I now use the Stock Trade Journal which automates all those tasks and makes it much easier search and sort.
