Keeping a Market Journal

Since I have more tasks than time, I'll probably place this as a link in multiple articles, but I wanted to get started.

There's a quote many of you may be familiar with, "Show me a trader that keeps good records and I'll show you a profitable trader"

I've never been particularly organized and I've NEVER been one to journal, however I did receive immense benefits in keeping a Market Journal (I call it a market journal now rather than a trade journal because I think keeping track of trades is one thing, but a real journal is something else).

I don't know for sure because I've never done it and I know that there's no one reason that can cover every one's reason for doing something, but it seems to me that when keeping a personal journal, whether one realizes it or not, sometimes I think by simply acknowledging our feelings about events through the day and in our lives is therapeutic in a way. I think saying an emotion you are feeling out loud such as, "I'm jealous" actually takes some of the power away from the emotion, you aren't fooling yourself, you aren't hiding from it or making excuses, you are acknowledging it and in doing so, I believe you take some of the negative power away from that emotion. I think personal journals act in a very similar way, we right down and acknowledge our thoughts and feelings.

I have found when a friend is in need and wants advice, the best advice I EVER give is to be quiet and let my friend talk, by the end of their talk I can usually point out, "I think you answered your own question, maybe it's not an easy answer, but it's not an easy problem, but in talking, you answered it"; so the concept is very similar.

A market journal is VERY similar in this concept, but it is meant to make you a better trader and being a better trader isn't about knowing the newest, trendiest trading technique or indicator, it's about finding what works for you personally. 

I can give the exact same trade to 10 different people, all have the same information, I can even tell them when to exit that trade and I can guarantee, there will be 10 different results from profits to losses.

Many of you know that I not only taught Technical Analysis for the Public Education System's "Adult Education" program, but I also acted as a trade advisor for 2 accounts in the area of $500,000 before any margin. I didn't trade the accounts personally, I gave the ideas, when to enter and what size (risk management). I found one of the two missed great trades and profits because he had a very low tolerance for risk, he's sometimes told me he entered a trade, but actually never did or entered in a size so small that there was no way to overcome the transaction costs and slippage or he'd make the stop much tighter than I recommended and in the end took a series of losses on these trades that he would have been better off just staying out of totally.

The other gentleman was very similar, but in some respects the opposite, he had no concept of risk. If I told him, "I'd buy 500 shares of XYX stock right now with a stop at $49.91" he'd think, "If 500 shares is good, than 5,000 shares must be better". Then I'd get a phone call that he has this $5000 intraday loss and wants to know if he should sell. I'd look at the stock and see a normal intraday move for that stock's volatility and wonder how a tiny $500 intraday draw down could possibly be $5,000 and he'd admit he bought 10 times more shares. I'd explain there's a reason I said 500 shares and that he needed to respect risk and not put half of his portfolio in one trade, then I'd go on to tell him that the stock is acting perfectly normal, there's nothing wrong with the trade based on evidence and the only fear over the trade was a position size way too big. The next day he's admit he sold at a $5,000 loss the first day in the trade (which was often the intraday low and just before the trade took off to the upside and worked as expected). Not only did he take a loss, but did so on a trade that worked perfectly, he's do this over and over again because there was a greed element that did not match up with his risk tolerance at all, this was incredibly frustrating because he'd do it over and over again and make up his own position sizes and stops just to enter a bigger trade than was responsible, a $500 day intraday swing on a $50,000 position was nothing to be concerned about, but a $5,000 intraday swing was the panic button for him.

In any case, I've always considered myself and always will, a lifelong student of the markets, never an expert or guru. I didn't know this and you might not either, but on Wall Street, the large investment houses have full-time psychologists for their traders, it's true! When a trader got in to a funk as we all do from time to time, they'd talk to the psychologist and identify something in the trader's past that he might be experiencing now that keeps him/her from performing well. For example, when I traded full-time and exclusively with no other source of income, for a living, I managed to easily lose an options account because I treated options the same way as 90% of all of the options positions that expire worthless every month, as a "Hail-Mary, lottery ticket". Options are in fact a Wall Street derivative product and like most derivatives, they are designed like Las Vegas, a win can be very addicting, but play long enough and the house always wins. Options are supremely organized to appeal to human greed and we often use them to try to make big gains, increase a small account quickly or make up for a big loss quickly and that's the appeal and trap of options.

I found for years I wouldn't touch options until I figured out how to use them in the exact opposite way that Wall Street wanted me to use them. I did the exact opposite of most people, I bought quality, in the money and with plenty of time and paid a higher price for it, but saw much better results, but for the longest time, the negative memory and emotion of my first experience with options effected my trading in not using this "tool" that can be at times, a great tool, not an exclusive tool, but a good tool for the job.

While trading for a living, I started keeping a journal to find out why I had so many winning trades, but my account benefited so little from them, one thing I found was very interesting.

For more than a decade, I wanted nothing more than to be a full-time trader, I finally got my chance, but did so with far too small of an account and I knew it at the time, if any of my students asked if they should do the same, I'd do everything I could to talk them out of it. Yes, I knew, but this was my chance and I was taking it. After keeping some records of trades for a month, I went back and looked, I was going great with the trades, lots of wins, small losses, good percentage moves, but, my trading size was way too small to overcome the transaction costs, slippage and other business costs.  Now if you have a character flaw or weakness, nothing will expose it faster and in a more painful way than the market. If you can't take responsibility for your own trades, you'll always have someone to blame, but you WILL NEVER BE A PROFITABLE TRADER! One thing I was good at from the time I was 8 years old or so was being VERY honest with myself. I looked at what was going on in my account and I knew instantly, I knew all along, it just took seeing it on paper to really seal the deal...

I wanted to be a full-time trader so bad that I started with about 1/3rd of the VERY minimum I'd recommend, therefore as to not lose my trading capital, I entered positions that were of such small position size, even if I had a double, it would scarcely move my portfolio's P/L trendline. I found that when I first started trading, I was day trading because my ex-wife was VERY unsupportive and I wanted to show her that I could produce a weekly paycheck, even though I was not at all suited to day trading. I had on average 200 transactions a week and was at least breaking even or making some money, but if I took the commission costs alone each week and counted those as income (as they were a large part of my P/L), I would have been making on average, just shy of an extra $1,000 a week, I needed about $4k a month to cover my bills and old income!

I knew I had to get over my fear of losing my trading capital otherwise I was going to lose my chance, I had to place bigger trading positions. Truthfully to do this though, I REALLY needed to get back to trading in a way I was most comfortable, a way I had the most confidence in and a way that made the trading costs a smaller percentage of my P/L.

My marriage wasn't going well for a number of years and trading put that extra bit of stress that really snapped something as my ex-wife was also Hungarian (like my current wife who is 110% supportive of anything I do) and grew up believing you work at the same job your entire life, you don't take chances and you certainly don't take that kind of money and put it in the market. My breakthrough came as a result of my declining marriage, I told her that while she was with me in the US, she wasn't really there as she would remind me of every day, "The only reason I'm in the US is because of you- I gave up my homeland and my family for you", even though she got her citizenship several years after we divorced and stayed in the US until very recently (she had left Hungary to come to the US for 1 year at 18 years old and never went back-she was VERY close, in fact detrimentally close to her family who had done everything they could to break up our marriage for nearly 10-years to bring her home). I finally told her, "I think you need to go home to Hungary, to be with your family and take as much time as you need, but if you come back, then you come back for the right reasons-because you want your life here with me."

To make an excruciatingly long story short, I had found out that she had an affair while she was in Hungary and while she stole money and constantly lied to me, especially about her parents, I NEVER would have EVER suspected she'd do that. For me, there are 3 reasons for a divorce and that was one of them; before she could even return I had moved all of her things out and got a divorce lawyer. However, this isn't the point.

The point is, with her now gone, I no longer had the pressure to try to deliver a weekly paycheck so she'd feel more comfortable about me trading, I took out enough money from savings to pay a month's worth of bills and I traded the market the way I thought it should be traded, rather than what I thought she needed me to do. I had trades of several weeks, VERY low commissions as I had 5% of the trades and made good money, I solved my problem... at least until the divorce part came.

In any case, I found a journal to be VERY helpful in solving other problems. I knew of a trader who could take $5,000 and turn it in to $100,000 faster than you could blink an eye, then at $100,000 he'd blow up every time. There's a saying I believe 100% and it comes from a trader, but you see it everywhere in life from who we marry to how we let people treat us; "You don't always get what you want, but you do get what you need", even if what you need is not good for you.  Think about the women who marry men who are emotionally or otherwise abusive because their fathers' were, it's definitely not what they want, but it is what they know, what they have been habituated to, what they are comfortable with. Men do the same, we marry overbearing, domineering women because they are similar to our mothers. You can probably think of 1,000 examples of this, well this was the same thing this trader was going through, maybe it was a self-worth problem, he was comfortable with so much success, but after that didn't feel worthy of any more- I really don't know, but you can't explain how many times he did this as being mere chance.

Keeping a market journal is a way for you to teach yourself, for you to peel back one layer of onion at a time in a way and pace you are comfortable with, to forget the newest fad in trading or what people say the best stop is and base it on what you are most comfortable and most successful with. There are 1,000 different ways to trade, you are not suited to each one. I don't care one bit that someone has a lot of success as a swing trader, if I don't have the exact same feelings about risk, adrenaline rushes many traders enter trades for, holding time, etc, I won't be as good as the other person is even if I copy everything the pother person does because one day I might not be able to take the risk and close the trade where they can and profit from the trade.

"Know thyself", that's the best trading advice you'll ever get and it's a lifelong journey, not a one time event as we experience new things every day. You might fail at trading 1 certain stock every time and it may all be psychological because you had a traumatic experience you hardly remember or never connected to your current trades.

I can tell you this... For 3 decades my grandfather told my grandmother, "Louis, you are killing me and after I die when they open me up, their going to find a BRAIN TUMOR killed me, that's what you're doing, you're giving me a brain tumor!" My grandfather lived to 90, my grandmother on the other hand died at 57, can you guess what killed her? A Brain Tumor! Chance? Well not too many years ago my mother (whose mother died of the brain tumor), her brother (my uncle) and myself opened a small cafe, my mother worked every day we owned it, 7 days a week. It was too much for anyone and she kept saying, "This cafe is going to give me cancer". We all warned her not to say such things and at 63 she had never had cancer, we decided to sell the cafe and two months before we sold it my mother was diagnosed with Ovarian Cancer (apparently when they did a hysterectomy when she had hers many years ago, they'd leave a small part of the ovary in to help with menopause years later, well this partial ovary had a cancer the size of a golf ball), luckily she beat it and she's been clear ever since, but I'm very careful about negative associations, I believe this extends to trading and its why I always tell members not to kick themselves on a trade that didn't go their way, learn what you can and move on, but don't make it personal-you have no idea how it will effect you later on.

Keeping a Journal...

I don't have time to get in to all of the particulars right now, but simply writing down what you paid, when you bought and when and what you sold for is useless for our purposes.

I'm going to give you some elements I found to be of value because in a way, we are acting as our own professional trading psychologists like they have on Wall Street.

First, details are super important,  you can look back on a chart of the stock and the overall market 3 or 6 months from now, but you rarely can remember how you felt and what the market sentiment was on that day you placed the trade so not only how you  felt about the trade, but what the overall market sentiment was like, how you felt about it, what propaganda the mainstream financial press was putting out, etc. It's important to record your mental state that day, did you just have a string of losing trades and maybe entered this trade a bit larger than normal to try to make the losses back quickly? Did you feel at the time you might be over-trading? Did you feel confident? Were you on a winning streak? Did you feel good overall? Did you have a fight with a significant other and were really not feeling good or not concentrating as well as you'd normally do? Was this a trade outside of what you normally found comfortable? None of these answers tells you anything right now, but it's exceptionally important that you are as honest as you can be and that you record as much detail so when you look back at that day a year from now, you  can feel the way you felt that day.

Print out a chart of the trade and even the market (SPX or NASDAQ) when you entered and why you entered, not what someone else thought, but what you thought even if it was about what someone else thought-remember, we have to be responsible for our own trades if we ever want to be successful and although this may sound strange, I have run in to people who are perfectly fine and almost seem to need to lose money, but they also need someone to blame. They are just as happy losing money if they have someone to blame as they are if they make money. Record why you entered, what your risk management was and why. Add as many details as possible, again, you want to be able to recreate that day a year from now, not just the market or the stock, but you personally.

Then when you close the trade, do the exact same, everything about the market, the stock/trade, your state of mind,  sentiment in the market, if you closed it because you were scared of losing a significant profit, if you had a good profit and lost it because you thought you could make more, everything that is subjective is important, but also everything that is objective. If you stayed in the trade longer than you should have, why? Did you have some objective information that led you to make that decision.

I think you get the gist. Now, learning.

You can't learn anything from any of this if you are still emotional about the trade, if you are still upset or still feeling like a million bucks, some time needs to pass both for your emotional state and to see what happened after in the market. I'd say you need at least a month, but maybe 3 months, maybe 6 months, however long it takes so you can look at all of this information objectively-as if it were someone else's trade you were analyzing.

First this creates discipline and in recording the information, you might find a reason you shouldn't enter the trade and save yourself time and money, but discipline, whether risk management or a journal of every trade is important in the market.

After you have looked at a dozen or so of these former trades, you'll start to see where you are successful and where you aren't, you can start to emphasize your strengths and try to understand and create new rules to deal with your weaknesses. You'll find events outside of trading that effect your performance, it could be as simple as how much sleep you got. In many cases you'll find you were over-trading to try to make up for a loss, you might even find you are revenge trading, trying to make  up the loss in the stock you lost the money in although there might have been better trades to make that money back. This is a process, but there's no book or course that will teach you more about trading and the trading that is most appropriate for your personality than this- TRUST ME. 

Yes, this takes some time, but a lot less than a 2 -year degree in trading and it will be immensely more specific to you personally. Many things you find, you will have expected and known about, but just seeing it on paper will finally help you overcome it, I promise you you will find other pattern that you never knew existed and are so far away from trading you'd never suspect them.

More than anything, this HAS TO BE A POSITIVE EXPERIENCE, DON'T EVER USE WHAT YOU FIND TO SAY, "OH DAMN, I KNEW I WAS DOING THAT, WHY DO I KEEP DOING THAT!" That is not only not helpful, it can be downright more damaging because you are reinforcing negative stereo-types or personal feelings you have about yourself, NEVER DO THAT.

It's best if you can look at this as if it were someone else and you were looking for patterns to help that person put. You can start recording more specific emotions and facts to deal with more specific problems like risk management, again, sometimes all you need to do is to see it, to essentially take the power away by saying it out loud. Sometimes it's seeing the pattern over and over and sometimes it's a total surprise that can't be denied.

Just keep in mind that you aren't trying to justify good or bad things so you must record EVERY trade. The market will give you as many reasons as you want to justify any opinion you have at any point in time, bullish or bearish, it is only by unbiased, objective data can we put the pieces of highest probabilities together, it's the same with this.

Finally, just like your life evolves every day, your trading and even more, the market will evolve. There are many Buddhists monks that spend a lifetime in meditation and self-reflection to achieve "Nirvana"  and many will never do so. You not only have your own past, present and future to understand, but the market as well, which is like one of the most complex, diverse and dynamic living organisms (each of millions of cells making it up are individual traders, changing and morphing every day) you'll ever see so this is a lifelong process, just like it is for the monks, but again, show me a trader who keeps good records and I'll show you a ....

Years ago I wrote this,  "Zen and the Art on Investing".  You may enjoy it, I haven't read it for years, but I believe it's still relevant, the bottom line is I believe trading is one of the most spiritual experiences one can engage in, you'll learn more about yourself through trading that I think almost any other method, that is, if you have the honesty and desire to know which can only benefit your trading.

Now to complete the other 19 hours of tasks I have over the next 7.5!