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Lessons from the Pros - Futures

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Creating a Trading Journal that Speaks to You

Tue, Oct 20 2009, 10:30 GMT
by Don Dawson

Online Trading Academy

Once we have our Trading Plan written and we are ready to commit our hard-earned money to the markets, we must keep track of our results and how we came about them. Notice that the Trading Plan came first. This will give us the rules and structure we need to survive in the markets. The Trading Journal will document for us how well we followed our Trading Plan and the results. The Trading Plan is a very effective tool to improve your trading when used on a daily basis.
With each day, you will see your trading improve. As traders, we want to see progress in our trading and when we have a stretch of bad luck, and trust me you will, then we want to know where we went wrong and how do we get back to where we were. Keep in mind that we do not want to just keep a log of all our mistakes. If we do not write down how and what we did on the good days, then we will have no map to lead us back to the right way of trading when we go astray. Some traders try to keep a mental Trading Journal. This works about as well as mental stops in the market. We tend to forget what happened after a couple of days and we will keep repeating our mistakes over and over again. This reminds me of the definition of insanity - "You keep doing the same thing over and over again expecting different results."

The Trading Journal is such a practical and useful tool; it will help you evolve into a well-developed trader. You will be amazed at your improvements by using a Trading Journal. Using this tool will help you keep focused on these important elements of your trading.

• Technical skills

• Mental state while trading

• Market/Personal psychology skills

Technical Skills

The use of a Trading Journal each day allows you to view the market systematically based on your technical skills. Observing these technical skills will help reduce your emotional input into your trading. You will be studying each market you trade and how you approached that market. This allows you to better understand the behavior of the markets you trade. By recording market developments in your journal, you will begin to notice that market patterns begin to jump out at you. Before long, you begin to anticipate patterns and respond much sooner than others who are not as familiar with the market as you are, thereby, giving you an edge. If you use technical indicators in your trading, you will find that your journal will reveal each one of their nuances and requirements to keep giving you that winning edge in the market. You will also be noting what type of market environment that your indicators work best in and if there are any weaknesses with them at certain times of the day (gaps, open, close, etc).
Support/Resistance levels will be monitored and you will start to see if you are using the right approach for finding these hidden levels. 

Mental State While Trading

I feel that this area and market/personal psychology is very important to document, as well, since I believe that trading is about 85% psychological, 10% money management and 5% strategy. Keeping a journal about yourself will be a great benefit for your trading.
Documenting our mental and emotional state throughout the day reveals many of our strengths and weaknesses. Each of us has certain limits that we approach that sometimes set us back.

• Perhaps we are only able to trade a certain size in the market

• Morning trading is better for us

• Account size needs to be kept at a level where we will not overtrade or take half-hazard trades simply because we have extra money in our accounts

• Maybe day trading causes us to overtrade

And the list goes on. By documenting these events, they become much more obvious to us. This is where you would document your strengths, too. Like when you have a series of good trades going, you would document your state of mind, awareness, discipline and anything else that would help you remember what you were doing when things were going well. The Trade Journal can help you see things that otherwise might go unnoticed if you were just trying to remember events. If you have any particular goals you are trying to reach, your Trading Journal is where you will record your progress. Your Trading Journal is much like a personal diary of your daily habits and actions in the market. Our goal of using our journal is to make it speak to us so we can tell what is happening to us during the trading day. Also, journals help you understand when it is time to change your strategy or perhaps just work on your personal mental state. If we have no records, I can assure you that strategy-tweaking will set in and that is not where the problem likely lies. Keeping a written journal will help you develop into a winning trader. This also allows you to witness your progress and helps develop the confidence you need to follow your Trading Plan. Many traders print out their charts each day and make comments on them so when they do their weekly journal review they can put pictures and words together.

Another area you may want to document is what were your expectations of the trade? Did you feel this trade had a good chance of reaching your target? Or perhaps, you did not feel so good that day and realized you were not on top of your trading game.

You may also ask yourself what did you actually get out of this trade? Did you learn anything from this trade that really stood out?

Explain why the trade was a winner or a loser. Was there some market news that came out and caused the market to act irrationally? Did you follow your plan? Were you focused through out the trade?

Keeping a journal can be done on your computer with a Word program, spreadsheet or even just having a handwritten journal works, too. Updating your journal is a personal preference. If you are an active day trader, you will need to make notes during the day and then update them at the end of the day. If you have time to enter data after each trade, you will probably remember more about how you were feeling and other important facts that might slip your mind during the trading day. The key is not to let the journal recording disrupt your trading. Reviewing your journal is best done after the market has closed, perhaps on a weekend. When you do this, you will be looking back over your results and looking for your strengths and weaknesses so you know where to focus your attention. This is why it is so important to keep detailed records so you can learn from past trades and increase your chances of success. We want to build on our strengths and stay away from trades in which you have demonstrated weakness.

Being aware of the above mentioned skill sets will help you develop your market knowledge and your abilities to act on your signals.

Now let's review some of the categories you want in your Trading Journal. Each of us will need to personalize our journals but these should give you a good starting point. 

Categories of Your Trading Journal

• Date/Time of Trade – This data can tell you which time of the year or day is your best trading time. I find that Fall and Winter are my best trading times. Perhaps it is because I want to be outdoors riding my motorcycle in the Summer and get too easily distracted. The time of day is important, too; you can look back over a series of trades and tell if you are better trading in the morning or afternoon session. Believe it or not, many traders actually trade better in one or the other session but rarely both.

• Date/Time of Trade Exit – This data can help you see if you are carrying trades overnight or maybe holding on to losers too long.
  If your Trading Plan says you are a day trader then you have no business holding positions overnight.

• Number of Contracts – Trading too many contracts can be detrimental to your trading account. A general rule for Futures trading is one contract for each $10K in your account.

• Were you Short or Long? – Identify your position bias here. Over time, you may want to check and make sure you are not partial to either the long or short side of the market. The general public is so used to being long Stocks that when they start trading Futures they tend to be more comfortable long the market.

• Initial Protective Stop in points – How many points was your initial protective stop? This should be identified in your Trading Plan and you want to make sure the number in this column matches your Trading Plan.

• Symbol of the market you are trading – With a large sample size of trades, you will eventually identify markets you have a better edge trading in. Look for markets that cause you to lose more than your original stop loss. Was it because you moved your stop, or is this market just too volatile for you?

• What price did you initiate the trade? – More of a record-keeping column for your profits and losses.

• Average Price paid – If you trade multiple contracts, you can list your average price here of all contracts you had. For example, you might scale into a position and this would be a way of knowing what the average price you paid for all the contracts is. My entries are at the same price, but I scale out at different prices. So I just list the trades based on different exit prices.

• Time in Trade – Here you will find how long you were actually in the trade. I really like this column. Most of my trades take about 1.5 – 2 hours to get out of, sometimes longer. If I start to notice the time I am in a trade is less than say 15 minutes or so, I know I am cutting my profits short and not following my plan.

• Points of Profit – Here we enter the number of points we made or lost on the trade.

• Commission – I list how much I paid for commissions on this trade. For each contract traded in the Futures market, you must pay a separate commission.

• Net Profit/Loss – You can take the points made or lost and multiply by the dollar value of a full point in the contract you are trading. Then deduct the commissions column from this value to give you your net profit/loss. For example, the ES is $50 per point. If you made 2.50 ES points, your gross profit is $125 per contract. Then you subtract your commissions' cost and you end up with your net profit/loss.

• "R" column – This is the column that measures your risk/reward ratio. You simply take your profit/loss and divide it by your initial risk on the trade and you get a ratio of risk/reward. Our initial profit objectives are usually 1:3 risk/reward. Meaning we risk 1 dollar to make 3 dollars. When a trade reaches our 1:3 target, we will see a 3.0 in this column. If it only goes to a 1:2 we will see a 2.0 instead. What we do not want to see in this column is a series of anything less than 1:2. If we do see this then we are trading with a dangerous risk/reward setup. We do not always reach this 1:3 goal on every trade, but if we don't give the trade a chance to get there, then we never will. One reason we use this is because we want to compare apples to apples when figuring our risk/reward. If you just listed your points made, then you would have a different view of your earnings when viewing a Bond trade compared to a SP trade because they both have different dollar values per point.

• Reason for taking the trade – You want to list what strategy that was in your Trading Plan that got you in this trade. However, if you took this trade for any other reason, you must list that reason here instead. Perhaps you took a trade based on emotion after a report and chased the market. You would simply list that in this column.

• Notes about trade – Here you can list your mental state during the trade; thoughts you had while in this trade. How comfortable were you while holding this position? List anything here that you feel affected your trade. Did you hold the trade to your target?

• Was I trading with the trend? – Look to identify if you were trading with the trend of the market. You will be surprised how many times you look back on a trade and realize you were guilty of picking tops and bottoms against the trend.

• Some columns on your Win/Loss percentage – Identify how your strategy is performing here. Be honest with yourself; if you did not follow your rules for the strategy, you must note that in your journal. So many times people tweak their strategy when the only thing wrong was where we were mentally while trading.

Your Trading Journal can also be kept for your weekly results, as well. Here you can enter columns for each day of the week and list items such as:

• Weekly points

• Balance of points for the week

• Return on investment (based on margin for trade)

• Dollar profit for the week

• Cumulative commissions paid

There are numerous columns you can create to gain important information about you and your trading. The key is to document every item that affects you while trading. Once you have collected this data on a regular basis, you will start to see patterns in your trading that are either helpful or need your attention to correct. Make sure to review your Trading Journal on a regular basis. There is no sense in creating this very important document if you do not use it to support you while trading.

I believe that once you use a Trading Journal you will ask yourself how you ever got along without it in the past. This may seem like a lot of extra work but remember, your competition most likely is sitting in their chair eating chips and watching TV thinking that the markets are going to give them something. We all know that whatever you take from the markets is well-deserved.

Published on  Wed, Oct 21 2009, 08:47 GMT