Sunday, February 28, 2010

Trading Journals: What Format is Right for Me?

Periodically, I get questions about the "right way" to keep a trading journal. There's really no one right answer, as the journal will meet different needs for different traders.

Broadly speaking, there are three kinds of journals that traders keep:

1) Learning Journals - This is how I started out as a trader. I kept daily records of market action, along with charts of indicators and indexes, and reviewed each day to identify the patterns that accompanied important directional moves. From such review, I learned which indicators and patterns were most promising (that's how I discovered the value of NYSE TICK, volume, sector confirmation/non-confirmation, new highs/lows, etc.). I also learned which patterns did not help me (chart formations, most canned indicators).

The purpose of the learning journal was to provide daily and weekly reviews to aid pattern identification. It was only after reviewing those journals for a considerable period of time that I attempted to identify the patterns in real time. And it was only after that that I paper traded and then traded live. If I had to identify one technique that most aided my development as a trader, it was keeping and reviewing those learning journals.

2) Psychological Journals - These are journals that track the traders themselves. These can be particularly valuable when traders are having problems with lapses of concentration, disruptions of decision-making, discipline problems, and the like. The idea is to use the journal to keep a real time record of what you're thinking and feeling, so that you can become a better self-observer. Keeping the journal helps a trader identify problem patterns as they are occurring, so that the trader can interrupt those patterns and not allow them to sway trading decisions.

The cognitive journals described in the Trading Coach book are a good example of psychological journals. They are used to monitor our self-talk and restructure the ways in which process personal and market events. Other psychological journals could be simple mood checklists that help a trader recognize when he or she is in or out of the performance zone.

3) Trading Journals - Classic trading journals are ways in which traders can track what they're trading and how well they're trading. Journal entries can be both qualitative (written summaries of the day's trading strengths and weaknesses) and quantitative (summaries of performance metrics, including P/L, number of winning/losing trades, etc.) . The idea of the trading journal is to help traders recognize when they're trading well (so that they can take maximum advantage of their performance) and when they're trading poorly (so that they can avoid deep drawdowns).

Trading journals can also be effective as review tools. For instance, the journal can review specific trades and evaluate performance, identifying areas for future improvement. The journals can also serve as a useful way for traders to log their ideas about markets, stocks, emerging patterns, etc. Many times, the journal can capture insights from the trading day that can be useful for review during future trading sessions.

As a rule, I'd encourage beginning traders to start with learning journals, then progress to trading journals, and then shift to psychological journals as needed. In my next post, I'll toss out a few suggestions that apply to all three journal types. For more on keeping trading journals, check out the posts below: