I was not best pleased with my end of year results last month. I knew something needed to change in order for me to improve.
It was time to ditch the excuses and keep a trading journal. I have had a number of comments and questions since I posted this in a tweet, so it makes sense to write about it in the hope that others will find it of some use.
I have now been a full-time trader for more than two years, and recently started my ShiftingShares blog. I have always told myself that I ‘didn’t have time’ to keep a trading journal or, indeed, that I in fact ‘traded too much’. I have realised that these were just excuses, and that I could not ever know if I was trading too much or even too little because I was not keeping any record.
I was jumping from trade-to-trade, but not conducting any in-depth analysis other than what I observed and then kept in my head.
This is, of course, stupid.
The oft-quoted statistic is that 90% of traders lose money. I am very sure that more than 90% of traders do not keep a trading journal. There is clearly positive correlation between losing money and not logging and analysing, but is there causation?
Learning from mistakes and holding oneself accountable would, in theory, improve results. As such, it would not be unreasonable to expect traders who keep a journal to see an increase in their P&Ls.
What gets measured gets managed
They say in business that what gets measured gets managed. Picking key performance indicators (KPIs), then, should be very important, because these are the key metrics that will be used and benchmarked.
For a start-up, revenue growth seems a sensible option; if a company cannot grow its top line it will struggle in the long run to increase its profit.
However, imagine you are a new business and a customer asks for a refund after 29 days instead of the 28 days stated on the receipt. Under the normal rules, the customer can no longer return the item for their money back and, if they did, you would lose this revenue and harm your KPI.
So, your KPI remains intact but, unfortunately, this has created so much ill will from the customer that they will never return to your shop again. A situation that could have created a loyal and long term profitable customer has now been used for the benefit of the short term.
This provides a perfect example of why we need to be very careful of what we measure in trading. Measuring your returns will mean a focus on moving the needle, regardless of the cost.
So, what is more sustainable? Making 200% per annum on two leveraged trades, each with the potential for 100% wipeout? Or a 30% annual return built up on hundreds of trades, none of which had the potential to wipe you out?
If your KPI is your return, this will only make you trade your P&L, which, in turn, will lead to riskier and even reckless behaviour.
I believe there are three critical components that will boost your bottom line in this business:
Ideas – generating more ideas will give you more frequent opportunities to make money in the market;
Winners – working out how to make more money from your winners will allow profitable trades to become even more profitable;
Losers – losing less in terms of batting average and percentage terms on your average losing trade will make a big difference to your equity curve.
Focusing your KPIs on the process and not the absolute return will ensure that you monitor the measurements that will drive your return at the end of the year.
The trading equation
If you understand the below equation, then you will know what is necessary to become a consistently profitable trader.
Ideas * (average loss + average gain)
More ideas, lower losers, and bigger winners. That is all we need. You can add lots of different things from a trading system but if you cannot generate ideas you will not be able to trade. Indeed, if you cannot manage your losers then you will find yourself in the poorhouse. If you cannot make any money on your winners, then nothing else matters!
Getting started with your journal
The first step towards avoiding this conundrum is buying a day-a-page A3 diary. It does not need to be too big, and we don’t need to spend hours every night on it. Realistically, fifteen minutes should be enough to jot down several things.
Personally, I think it is worth looking at:
What went wrong that day – this is vital because when we notice an error we can do something about it;
What you are going to do to prevent or at least minimise what went wrong from happening again;
What went right that day – it is no good creating a journal just to give yourself a daily kicking. It is crucial to acknowledge your successes;
What you bought – position size, and why you bought;
What you sold, and why;
Brief ideas for tomorrow.
After about two weeks, you should have enough qualitative data to skim across and evaluate.
At this point, you need to ask yourself:
What was the main reason for buying? If you are finding that you are entering new positions because you are bored, then obviously you need to stop punting stuff out of boredom. If you really can’t kick this habit very easily then you are not a trader – you are a gambler. Close your trading account and go down to the casino instead.
Why are you closing positions? If you are selling positions with no reason other than looking at the intraday price, is that definitely the most effective way? What is your risk/reward? What are obvious resistance points on the chart and are you selling anywhere near them?
Are you sticking to your plans? This is a key indicator of your discipline. Discipline is everything in trading; those who lack it are soon unable to trade.
Keeping emotions in check
However hard you try, it is not possible to completely separate your personal and professional life from your trading life. Whatever emotions you are feeling will be amplified in your trading results. If you are angry or under pressure at work, then you will be more likely to take high risk trades. If you are anxious, then you be will more likely to book profits by snatching them rather than letting them run.
If you decide to focus on the process rather than trading your P&L, you will benefit massively in the long run. Keep a diary of how you are feeling throughout the day and be honest with yourself. Most people are not able to do this, and this is a big reason why most people do not make money in the market.
It is always easier to blame something or someone else. Whether or not that blame is justified is a separate issue. It does not help us towards our end goal of becoming and staying a consistently profitable trader.
Keeping a trading journal will be a conscious step in the right direction towards your end goal.