6 Ways To Improve Your Trading Every Day

In an informative article, Mark Boucher recently emphasized the importance of keeping a trading journal . He pointed out that journals are an excellent tool to help traders identify setups in the market.  Journals also aid in a trader's self-assessment: by keeping track of your mind frame during trading, you can begin to observe your own trading patterns.  Mark additionally makes a point that I recently stressed on my website: that good trading journals serve as day-to-day business plans.  By documenting your expectations for the coming session, the journal becomes a guide for the day's trading performance and provides a record of that performance.  As a psychologist who has worked with trading professionals, I have learned the importance of unraveling the question of chicken-and-egg:  Did psychological problems ruin a good trading plan, or was the plan faulty to begin with?  Reviewing a properly constructed trading journal greatly aids this diagnosis. 

There is a second useful aspect of trading journals touched upon in Larry Conners' interview with Richard Machowicz.  Richard points out that a key ingredient in reaching your goals is having a target and keeping it in focus at all times.  The trading journal, in serving as a daily business plan, provides just such a target.  It can be reviewed during the trading day as part of mental rehearsals, and it can orient the trader in the heat of battle.  I have administered personality batteries to nearly 200 active traders; one of the most robust findings from this work is that people who are prone to impulsivity are particularly at risk for poor trading performance.  A well-constructed, mentally rehearsed trading journal acts as a kind of brake on trader impulses, allowing the trader's inner voice to override his or her momentary urges.   

One element not mentioned in Mark's article has been central to the journals of traders I've worked with: a statistical assessment of performance.  There are very specific performance metrics that help a trader--and his or her mentor--understand what is going right and wrong with trading.  In their book How Markets Really Work, Larry Connors and Conor Sen tell the story of Bill James, who revolutionized the process of player selection in major league baseball by focusing on statistical measures of performance rather than subjective impressions.  Just as such statistical measures can be valuable in identifying tradable edges in the market, they can also assist the trader in self-evaluation.  The idea is to think of yourself as a kind of trading system: the same metrics that help you evaluate a mechanical system can also illuminate your trading.  A new generation of software is emerging for active traders to calculate these metrics on the fly (see Trader DNA for a good example), making it easier than ever to create scientific trading journals.

Some of the metrics that I use with traders include:

• Number of trades per day (or week) - It's valuable to take a look at whether you are trading more actively or less actively than your norm, particularly as a function of market conditions.  It is not unusual to find periods of time when a trader trades more actively during slow, range bound markets.  These trades, taken together, are rarely profitable and are often placed out of boredom or frustration.  The number of trades measure helps you determine if you are actively trading or simply overtrading.
• Number of winning versus losing trades and average size of winning and losing trades - Speaking broadly, we have two kinds of successful traders: one who makes money by being right more often than wrong and those who make money by having significantly larger winners than losers.  (Of course, the blending of the two is ideal, but--in my experience--rare).  Keeping tabs on the proportion of winning, losing, and scratched trades and assessing the average size of the winners and losers helps traders see if they're truly doing what they need to do to make money.  Patterns of cutting winners short and holding onto losers stand out in this measure.
• Average holding time for losing and winning trades - This measure also helps greatly in assessing a trader's risk management.  Very often the metric will be skewed negatively (the trader is holding onto losers longer than winners) when traders are making a favorable proportion of winning trades, but still not finishing "green".
• Number of long and short trades and the profitability of each - This metric detects whether a trader is trading with an opinion.  Active traders are sometimes so immersed in the short-term action of the market that they don't realize that they're predominantly trading from one side.  This may be fine in a trending market that is going the trader's way, but may not produce good results in a slow, narrow, non-trending environment.
• Number and profitability of winning/losing trades as a function of time of day or day of week - It is not at all unusual for active traders to be successful at one time of day and then struggle at other times.  This is particularly common with respect to midday hours, which tend to be slower than opening and closing periods in the stock market.  Upon seeing their metrics, many traders simply decide to not trade the lunchtime hours, focusing their attention instead on periods that offer greater volatility and liquidity.  Traders may also find that their results are poorer on Mondays than during the rest of the week (they're out of rhythm with the markets) or poorer during days with economic announcements (they're caught in whipsaws). 
• Trading performance (P/L) as a function of market conditions - Categorizing days as high, average, or low on three dimensions: up/down, trending/non-trending, and volatile/non-volatile and breaking down trading performance within each category can help traders pinpoint where they are most and least successful.  If a trader is having trouble with slow market days, for instance, setups for these markets can be identified and rehearsed as part of the trading journal.  Simulations, including software that allows traders to replay the market day--Ensign and e-Signal come immediately to mind--are also useful in working on trading under specific market conditions.

It is not unusual for traders to look to these metrics to find their weaknesses.  As I stress in my book The Psychology of Trading, however, it is equally important to identify your trading strengths.  By creating a model of these strengths and doing more of what works, you leverage your market learning.  The trading journal, powered by metrics, can help you discover the trader you really are when you're at your best.

Brett N. Steenbarger, Ph.D.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003).

As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders.

An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Since obtaining his baccalaureate degree from Duke University in 1976 and his Ph.D. in Clinical Psychology from the University of Kansas in 1982. His current research includes intensive, short-term approaches for developing focus and concentration in high risk/reward performance activities and the modeling of intermarket relationships among global trading instruments. Brett does not offer services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.