How And Why To Keep A Trading Journal

One of the first things I did in high school as I was just beginning my trading career was to try and find every single great trader and master that I could find. Next, I did everything I could to study what made them a great trader. What characteristics did they share with one another? I began to notice that in looking for great traders there were two types – meteors – those traders who had spectacular returns for one, three, even five years; and fixed stars – those traders who had consistently excellent returns for the risk they took for a decade or more. I tried always to separate these two groups to see what their differences were. After many years, I saw literally hundreds of meteors drop from the sky and either exit the markets wiped-out or turn their great short-term gains into less-than-spectacular long-term risk/reward performance.

There were a few things that virtually every fixed star did – and I later noticed that a core group of shared characteristics were great screens for determining if a meteor was just a meteor or a budding fixed star. One of the most critical elements of trading shared by nearly every great fixed-star trader I studied was one form or another of a trading journal. Indeed some historically great traders, like Bernard Baruch, for instance, singled a trading journal out as one of the most important tools. Other great traders, like Bill O’Neil, even sell annual reviews of the great trades and great stocks of the past year.

Two important things that a trading journal does for a trader is to get him to better understand the markets in retrospect and to get a trader to better understand his own strengths and weaknesses. In my opinion, these are two of the most critical things that a trader needs to do – making a trading journal a MUST for all serious traders. And just as critical as the journal itself is a consistent and periodic review of that journal – for this is where real insight, both into the markets and into one’s self, derive.

Think of a trading journal as a "Dear diary" of all your innermost trading thoughts, actions, emotions and analyses. It is your scrapbook and monitoring of the market, as well as a thorough detailed description of your trading actions and the thoughts, rules, analysis and reasons for every action you take in your trading. DO NOT SHARE YOUR JOURNAL WITH ANYONE – IT IS FOR YOUR BENEFIT ALONE UNLESS YOU ARE TRADING WITH OR FOR SOMEONE ELSE!

Let’s look carefully at the scrapbook component of a journal. This is your daily brainstorming and gathering of any information that might impact your investing. Every day I scan Investor’s Business Daily and cut out the article on market timing, as well as the list of leading and lagging industries in the New High and New Low list. I also cut out any article that I think might be helpful to my trading. I do the same thing with a large body of different services that I read. Weekly with Barron’s; monthly with Forbes; and the same with any other periodical or newsletter or service that you find valuable.

But most of your scrapbook should be made up of printouts of charts -- charts that show technically significant events by groups or sectors or funds, or individual stocks (breakouts of head-and-shoulders or cup-and-handle or flags; breakdowns of the mirror opposite; volume thrusts of the broad market indexes; follow-through days, and down days on higher volume). Every day try to look at hundreds of charts of broad groups and funds and different market segments and stocks to see commonality and plurality and to make sure that technicals are confirming what broad market tools and your other scrapbook investigations are pointing to. 

Also, every day write out your gut opinion. Is the market headed substantially higher or lower? Why do you think so? What would change your opinion? More importantly, what are the leading groups and how are they performing technically? Are lots of stocks from any group currently breaking out to the upside or breaking down to the downside? A thorough daily analysis of new highs and new lows and the breadth of different groups that make these lists should yield substantial fruit in this regard. Are leading groups starting to change direction? Are lagging groups starting to reverse? By following all these and voraciously pursuing the technical picture daily, you will have an incredible tool to look back on to give you phenomenal insight to the markets and how they behave.

A journal also needs to be a detailed description of your thoughts and actions. Every trade should have a printout of the chart as you make the trade, and at each and every change in protective stops, and at every change in decision point up to the point of exit. Like a before-and-after picture of your every decision. Why did you allocate what you did to each trade? Why did you choose that protective stop? Why did you enter the trade? Did it meet all of your criteria? Are your criteria written out as clear rules to follow for every trade? Why did you trail the stop where you did? Why did you exit when you did? How is your percentage reliability of trades over time? Does it fluctuate? If so, why? What do you think about each trade as you make it? Are you most nervous about your best trades? Does your gut tell you anything consistently? Which trades worked the best and worst? Were there any common elements? Are there screens you notice that would have focused your trading more in the best trades? Are there screens you’re using that prevented you from taking some great trades consistently? Are you making the types of returns that were your goal in terms of risk-and-reward? Why or why not? This is a painstaking analysis of everything you do in every element of it.

A full-time professional trader should spend AT LEAST ONE HOUR A DAY on his journal, and probably more like two hours. A serious intermediate-term trader should spend at least two hours a week or more on his journal. Review your journal every 30-60 trades or every quarter, whichever comes first. Less trading can allow semi-annual review. But by working every day or every week on a document of the market's actions and of your own actions, you will find that a journal is one of the best tools available for a trader to improve his understanding both of the markets and of himself. Few tools will help a trader more.