Keeping the Trading Journal

By September 27, 2016 Newsletter No Comments

The following excerpt is taken for trading journal from Dr. Alexander Elder’s book “Trading for a Living“.

Are you sabotaging yourself? The only way to find out is to keep good records, especially a Trader’s Journal and an equity curve. The angle of your equity curve is an objective indicator of your behavior. If it slopes up, with few down-ticks, you are doing well. If it points down, it shows you are not in gear with the markets and possibly in a self sabotage mode. When you observe that, reduce the size of your trades and spend more time with your Trader’s Journal figuring out what you are doing.

Trading Journal

You need to become a self-aware trader. Keep good records, learn from past mistakes, and do better in the future. Traders who lose money tend to feel ashamed. A bad loss feels like a nasty comment – most people just want to cover up, walk away, and never be seen again. Hiding does not solve anything. Use the pain of a loss to turn yourself into a disciplined winner.

Discipline means designing, testing, and following your trading system. It means learning to enter and exit in response to predefined signals rather than jumping in and out on a whim. It means doing the right thing, not the easy thing. And the first challenge on the road to disciplined trading involves setting up a record-keeping system.

Becoming a good trader means taking several courses – psychology, technical analysis, and money management. Each course requires its own set of records. You will have to score high on all three in order to graduate. Your first essential record is a spreadsheet of all your trades. You have to keep track of entries and exits, slippage and commissions as a well as profits and losses.

Another essential record shows the balance in your account at the end of each month. Plot it on a chart, creating an equity curve whose angle will tell you whether you are in gear with the market. The goal is a steady uptrend, punctuated by shallow declines. If your curve slopes down, it shows you are not in tune with the markets and must reduce the size of your trades. A jagged equity curve tends to be a sign of impulsive trading.

Your trading diary is the third essential record. Whenever you enter a trade, print out the charts that prompted you to buy or sell. Paste them on the left page of a large notebook and write a few words explaining why you bought or sold, stating your objective and a stop. When you close out that trade, print out the charts again, paste them on the right page and write what you have learned from the complete trade.

Traders fail because of impatience and lack of discipline. Good records set you apart from the market crowd and put you on the road to success. If you are serious about learning to trade, start with a relatively small account and set a goal of learning to trade rather than making a lot of money in a hurry. Keep a diary and put a performance grade on every trade.

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