Thursday, May 02, 2019

Trading Psychology Techniques - 1: Keeping a Trading Journal

As mentioned in the previous post and the recent Forbes article, I will be posting a series dealing with research-backed methods for improving both our psychology and our trading performance.  I am doing this because so much of the writing I see in the area of trading psychology is long on what to do and short on how to do it.  This series will focus on the how-to's, to help traders better coach themselves.

The focus of this post is on the proper construction and use of trading journals.  Several evidence-based approaches to psychological change make substantial use of journaling, including cognitive therapy.  Like many cognitive-behavioral methods, journaling can improve our self-awareness, making us more mindful both of what we are doing well and what needs improvement.

Traders often keep journals, but in ways that are not especially helpful.  A few common journaling mistakes are:

1)  Inconsistency - Journal entries are sometimes detailed, sometimes sketchy.  They are sometimes more frequent, sometimes less frequent.  The trader lacks a consistent journaling process.  The frequency of the journal is often out of line with the frequency of trading.  If traders are making multiple decisions per week, for example, it makes sense to keep a weekly journal.  If the trader is making multiple decisions daily, a daily journal will be useful.

2)  Isolation of Entries - A trader writes a journal entry one day, then the next day, then the next.  Very often, the entries do not reference one another:  they are written in isolation.  As a result, the trader gets little cumulative benefit from the journal process.  It is very common that traders never look over journal entries from a week or a month ago, and thus don't fully learn from experience.

3)  Focus on Reporting - The trader's journal entries report what happened during the day--sometimes in detail--but spend relatively little time analyzing why these things happened and what they can learn from them.  The journal ends up being more descriptive than prescriptive.  The journal as a reporting tool is not necessarily a performance-building tool.

4)  Focus on Venting - The trader's journal expresses frustrations and focuses on things that went wrong, mistakes made, etc.  There is little time spent on what the trader did well, and there is little constructive writing about how the trader could correct the mistakes.  A useful journal is a constructive journal; it isn't mired in negativity.

5)  Narrowness of Focus - The journal focuses mainly in one or two areas, not with trading overall.  For example, the journal may focus on psychology and not actual trading decisions.  The journal might focus on entries and exits, but not position and risk management.  It is uncanny that the areas left out of journals are often those most important to work on!

So, what are some best practices regarding the keeping of journals?

1)  Frequency - Note that, in cognitive therapy, people keep journals daily and make multiple entries per day.  They write in the journal as soon after significant events occur.  That allows them to observe what happened, how they processed the event, how that processing impacted them emotionally, and how they might process the occurrence differently and more constructively.  By journaling often, the person becomes very aware of their thinking and grows in the ability to address problem patterns before they occur.  The frequent journaling becomes a tool for building positive habit patterns.  

2)  Backward and Forward Looking - The ideal journal entry notes something distinctive that was done right or something distinctive that needs improvement.  In both cases, the focus in on clearly identifying what was done right or wrong and why it was desirable or undesirable.  Then the journal entry looks forward to identify a concrete goal based on the observation and a specific plan for implementing that plan going forward.  For example, the journal entry might identify a way of scaling into a position that was very effective in several trades.  This becomes a concrete goal to implement going forward, perhaps with a position management checklist to be used in coming trading sessions.

3)  Reviewing as Well as Viewing - If the journal entry sets a goal and a plan for reaching that goal, the next entry should spend some time reviewing how well the goal was reached.  If the goal wasn't fully met, modifications in plans can be made going forward.  If the goal was reached, there might be some reflection on how to make the improved practice part of an ongoing process.  If a goal is worth setting, it's worth implementing and reviewing!

4)  Keeping it Doable - Focused goal-setting and review is more effective than scattershot approaches to change.  You might want to work on one main goal per week or month, depending upon the frequency of your trading.  You don't want journaling to become unduly burdensome, and you don't want to be setting different goals every day, never truly building changes into robust habit patterns.

I like keeping journals in apps that allow you to share the entries with teammates and colleagues and that allow you to tag entries and sort through them during your reviews.  As I mentioned in a previous post, an app like Evernote allows your journal to become truly multimedia and interactive.  Pulling up all your entries on a given topic, such as risk management, is a great way to track your progress and learning.  At SMB, for example, trading journals structured as daily report cards are routinely shared with mentors to facilitate feedback and learning.

The bottom line is that the focus should be on journaling as an ongoing learning and performance-enhancement process.  Keeping a journal has minimal value unless it is part of a cumulative process of assessment and deliberate practice.

Further Reading: