Monday, November 30, 2009

Using Trading Journals to Learn and Relearn Trading

Trading journals can be effective tools in changing trading behaviors. They can also be helpful in tracking and working on performance. A while back, I wrote on the topic of formatting journals for trading success. The stimulus for that post was the realization that traders often use journals in ways that are not constructive: simply as tools to vent frustration and recount trading problems.

When I first began learning to trade, I used journals in ways different from the above. Each day I reviewed major turning points in the stock indexes and observed how indicators and correlated indexes behaved. The exercise consisted of identifying--in retrospect--the trading opportunities that were best and the information that might have put me into those trades.

In a sense, I used the journal to reverse engineer markets.

The journals consisted of pages and pages of annotated charts. Although I did not use the term at the time, the goal was pattern recognition.

Sure enough, patterns began to recur in my journal entries. That is how I learned about confirmations/non-confirmations and their roles in continuations and reversals of moves. That's also how I learned about intraday sentiment and NYSE TICK; the role of volume in estimating volatility; and the distinguishing features of breakout trades, range days, and trend days.

In the beginning, I didn't know what to look for. I spent time with many indicators (including many of the common ones included in charting programs, as well as chart patterns and cycles) that added little value to my pattern recognition. It was the patterns that recurred over time that became my focus.

I realized that if I could just find a few stable patterns, I could work on recognizing them in real time and sustaining profitability.

I spent over a year on those journals before I ever placed a trade. The charts are still organized in folders in my cabinet for reference.

One of my goals for 2010 is to repeat that learning process and learn entirely new patterns. As I noted a while back, every day the market teaches us lessons. The challenge is being prepared to learn from them...and then relearn them.