Trading Rule – “Always maintain a Trading Diary”

WHAT DO WE UNDERSTAND BY A TRADING DIARY? IT IS BASICALLY A RECORD OF ALL YOUR TRADES WITH AN ANALYSIS OF THE THOUGHT PROCESS BEHIND THESE TRADES AND YOUR EXPLANATION OF THE OUTCOME. THE TRADING DIARY IS NOT JUST ABOUT DOCUMENTING YOUR TRADES; THAT IS SOMETHING YOUR CONTRACT NOTE CAN ALSO DO. THE TRADING DIARY IS ALL ABOUT CRYSTALLISING YOUR THOUGHTS ON A TRADE AND EVALUATE IF YOUR TRADING PROCESS IS PROPER OR NOT. ABOVE ALL, IT HELPS YOU TO CREATE A TRADING CHECK LIST AND GIVES YOU IMPORTANT CUES FOR YOUR TRADING STRATEGY NEXT DAY

 

TRADING DIARY DOCUMENTS AND EXPLAINS

When you actually trade in the market, you do not have the time and the patience to do a detailed analysis. In fact, that is the time to trade and not to spend time on reviewing your trades. But, you must definitely review your trades at the end of the day. The first thing that a trading diary does is that it forces you to document your thinking behind each trade. You can back test your logic and see if the logic is working or not. Secondly, it is a review of your trading process. You may have put the stop loss too short or your risk-return trade-off may not have been optimal. Alternatively, you may not have taken care of execution. For example, you may have tried to execute a buy trade in a rising market as a market order. Alternatively, you could have used a limit trade in a falling market. Use the trading diary to explain to yourself where you think you went wrong and what you can do differently. The basic rule here is that you must be absolutely honest and transparent with yourself.

TRADING DIARY HAS TO BE ACTIONABLE TO BE USEFUL

This is the cardinal rule when you maintain a trading diary. The idea is not to have a very theoretical and sophisticated explanation of how you got your call wrong. It must be a rigorous review of the trading view and of the trading process. The trade is a combination of your view, the process and the psychology behind the trade. Your trading diary must examine all these aspects. There are 4 conditions for the trading diary to be actionable. Firstly, it must classify the key pointers into controllable and non-controllable factors. You need to prioritize the controllable factors. Second, you need to focus on the process because that is where most trading decisions falter. The process for setting stop losses, profit targets, executing trades etc. Thirdly, trading diary must be measurable. The whole purpose is to improve your trading performance over time and that is the bottom-line. Lastly, the trading diary must be accompanied by an ATR (Action Taken Report). If the diary is not acted upon then the entire purpose of the trading diary gets defeated.

“A trading diary is, perhaps, the most important and most neglected tool in determining your success or failure while trading the markets” – Toni Hansen

 

6 WAYS IN WHICH A TRADING DIARY WILL HELP YOU IMPROVE PERFORMANCE

  1. The trading diary helps you to honestly and independently evaluate where you went right and where you went wrong. Remember, your trading diary is a confidential document which is only meant for your own consumption. Therefore, you can afford to be as honest and brutal on yourself as possible. Trading diary forces you to document and therefore makes you objectively think about your decisions, your actions and the impact on your trading performance. Honesty is the key.
  2. Trading diary focuses on action points. That means you have a clear idea what are the shortcomings in your trading plan and the areas you need to act upon. The whole idea of action points is that it goes beyond just explaining the performance to actually taking corrective action. This actually gives a more pragmatic input to your entire trading performance rather than mere suggestions.
  3. Trading diary focuses on the purely controllable factors. The biggest mistake that most traders commit is to blame the performance on the volatility in the markets and just leave it at that. The diary makes you focus on the trading actions that you take rather than focus purely on the environment.
  4. Trading diary actually impels you to look at a problem head on. When you place orders and your stop losses are getting triggered, then there is a problem either with your understanding of the market or in your stop loss method. Once you are able to identify the problem, the resolution is a lot simpler.
  5. Over a period of time, your daily trade jottings can be consolidated into weekly and monthly compendiums of your trading thoughts. Since the diary looks at your approach, your performance and the environment, it helps you to mould your strategy quite easily. The diary actually ends up becoming a documentation of your trades and helps you to also mould your trading plan accordingly.
  6. The beauty of trading is that it is all about good trading habits and good trading habits are never built overnight. It is an accumulation of your aggregate experiences and your learnings along the way. As you identify the weak areas and build upon it you actually build good trading habits which eventually become part of your trading strategy. It is this molding that is the biggest contribution of a trading diary.

 

SO BE HONEST, ANALYTICAL AND ACTIONABLE IN YOUR TRADING DIARY

If you just create your trading diary for the heck of it, then you can as well forget about it. Mechanical recording of trades is not going to help. What the trading diary calls for is an in-depth analysis of view formation, trading process, trade monitoring, the way you react to external stimuli, the factors you consider in trade etc. It is a gradual and iterative process and it has to ultimately be actionable. That is the bottom-line for you as a trader.

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