People who like to explore and learn always make mistakes. Curious and intelligent people inevitably make errors. Someone who never makes a mistake is a narrow-minded individual who stays in his shell, never does anything new and always repeats himself. Whenever I hire people, I tell them that I expect them to make mistakes—it is a part of their job description! I also tell them that what makes me really angry is when people repeat mistakes.
Making mistakes is a sign of learning and exploring. Repeating mistakes is a sign of laziness, carelessness, or some neurotic problems. There is a nice piece of advice in an old Russian saying: “Do not step on the same rake twice!”
The best way to learn from your trading mistakes and victories is by keeping a Trading Diary. It allows you to convert the joy of successes and the pain of losses into the bankable gold of experience.
A Trading Diary is a pictorial record of your trades (see Figure 3.2). It documents your entries and exits by using charts marked up with arrows, lines, and commentaries. I create a diary entry for every purchase or sale. To make sure my diary is always current and up to date I have a rule—no breakfast until my diary for the previous day is completed. This encourages me to update the diary before the market opens and a new trading day begins.
It is important to document every trade. The only exception to this rule is very active day-trading. If you make a dozen trades each day, you can allow yourself to create a diary entry for just every third or fourth trade.
Why a pictorial diary, in addition to the spreadsheet?
You probably carry with you photos of people and things you care about. In your wallet, purse, or on your desktop you have photos of your wife, girlfriend, husband, children, dog, house, car. Now I also want you to carry the pictures of your trades, so that you get to know them intimately and understand them better than before. Creating and maintaining a Trading Diary is the best way to learn from your experience.
In February 2007 a variety of signals which we will discuss later in this book led me to become extremely bearish on the stock market. I went heavily short stocks and index futures, as well as long index puts. When the stock market collapsed, I was loaded with shorts. When my indicators signaled that a bottom was at hand, I spent hours taking profits, covering shorts. The next day, instead of going to the office, I worked from early morning until 2:30 PM documenting the trades I had just closed out. If I had to choose between my profit from catching that swing or having my Diary, I would choose the Diary! I can always make more profits if I continue to use my Diary, but without it profits can quickly turn to losses.
To maintain a Trading Diary, I suggest using two inexpensive and widely available programs. You can add them to whatever programs you already use for market analysis. One of them will help you capture and edit images, while the other will let you store and retrieve your diary records.
The best tool for taking pictures of your charts and making notes on them is a program called SnagIt. It makes it easy to capture images from any charting program, draw and write on them and paste them into your diary. Windows provides a PrintScreen utility for taking screen-shots, but nothing compares to the ease, versatility, and the sheer pleasure of using SnagIt (www.snagit.com). I use it almost daily for updating my Diary or sharing trading ideas with friends. Whenever we shoot each other an e-mail, we tend to send charts captured and marked up with SnagIt instead of writing long messages.
My program of choice for keeping a trading diary is Microsoft Outlook.1 This is a fantastically powerful program, but most people scratch its surface by using it only for e-mail. I’ve come to believe that Outlook is the best program for keeping myself organized, focused, relaxed, and in control—and not only in the markets, but for life in general.2
The instructions for using SnagIt and Outlook are included with both programs. The following comments touch upon just a few features of these programs.
Go to the Calendars tab in Outlook, create a new Calendar, and name it Trading. You can view any Calendar in a daily, weekly, or monthly format. I prefer a monthly format, which serves as a table of contents for all of my trades, both open and closed (see Figure 3.3). Lately, I have begun keeping two calendars—one for regular trades and another for long-term positions which stay open for months or even longer.
1I began keeping my first trading diary years ago in a large notebook. I used to print out black-and-white charts on a dot-matrix printer, cut them out and paste them into the notebook with double-stick tape, then mark up trading signals with colored pens. Years later I graduated to an electronic diary, creating a Word file for every trade. I found both diaries cumbersome to keep, and it was difficult to find something in Word when I wanted to look for an old trade. Finally, Kerry Lovvorn (www.kerrylovvorn.com), a camper who became my co-manager of the Spike group, showed me how to implement my diary using the power of Microsoft Outlook. It put me completely in control of my trading history. Later I met a number of traders who kept their diaries in a program called Lotus Notes.
2If you feel as if your work and paperwork are out of control, there are two books I highly recommend. In Getting Things Done, David Allen teaches a system for bringing simplicity and clarity into your life. In Total Workday Control, Michael Linenberger shows how to implement those principles in Outlook. I have read both books several times, took extensive notes, and implemented many of their recommendations. They had a strong positive impact on my life.
Together with two trader friends mentioned elsewhere in this book, Kerry Lovvorn and Jeff Parker, we have created an Outlook add-on for keeping a Diary which we named AK-47. Initially, the three of us built it for ourselves, but then we offered it to the public, and you can see its description on www.elder.com.
Whenever you click on a calendar to create a new record for a trade, Outlook allows you to label that entry. The labels show up in the monthly view, and if you set a system of rules for coloring labels, each of them will carry a message (see Figure 3.4).
Most of my Diary entries include two charts—a weekly and a daily. Depending on the trade, I may also add a monthly or intraday chart. Figures 3.5 and 3.6 show a recent example of a Diary entry.
A trader without a Diary is like a senile person. The poor man cannot learn anything: you can show him today how to zip his pants, but tomorrow he will forget again. Most losing traders are stuck, repeating the same mistakes over and over again. A Trading Diary helps you break out of that vicious circle. Maintaining and reviewing a Trading Diary will lift you to the level of a thinking and learning human being.
Now, before we move on to the next chapter, would you like to see my exit from that trade, shorting DB? We have already looked at my entry, but what if I told you I forgot how I exited? What if I waved my fingers in the air and told you that DB went down and I covered? How useful would that be to you?
Not very.
I hope that by now I have convinced you that it is essential tokeep a Trading Diary. Will you promise to keep one? If so, I’ll open my Outlook again and bring up the exit diary. Take a look at Figures 3.7 and 3.8.
The weekly chart shows the source of a trading idea—an e-mail from a friend who ran several market scans and shared the results with me. Diagonal red arrows mark bearish divergences. Thin vertical arrows show that the stock is prone to sharp drops. There is also a remark chiding myself for being a little too eager to enter. I was very bearish on the stock market and restless after missing an entry into a trade that came from my own scan.
You can see that the exit is also graded. Its 45% rating was not that great, but the trade grade was very nice. Taking over $9 profit on 1,000 shares was a good payday. See the note—“keep an eye on it to maybe short again.” The trade does not have to end when you exit a position. There is a lot to review, much to learn, and you can continue to make plans for the future. I hope that this exercise has helped convince you that it is important to keep a Trading Diary. You need to document your successes and failures and learn from both.
Making mistakes is a sign of learning and exploring. Repeating mistakes is a sign of laziness, carelessness, or some neurotic problems. There is a nice piece of advice in an old Russian saying: “Do not step on the same rake twice!”
The best way to learn from your trading mistakes and victories is by keeping a Trading Diary. It allows you to convert the joy of successes and the pain of losses into the bankable gold of experience.
A Trading Diary is a pictorial record of your trades (see Figure 3.2). It documents your entries and exits by using charts marked up with arrows, lines, and commentaries. I create a diary entry for every purchase or sale. To make sure my diary is always current and up to date I have a rule—no breakfast until my diary for the previous day is completed. This encourages me to update the diary before the market opens and a new trading day begins.
It is important to document every trade. The only exception to this rule is very active day-trading. If you make a dozen trades each day, you can allow yourself to create a diary entry for just every third or fourth trade.
Why a pictorial diary, in addition to the spreadsheet?
Figure 3.2 A Visual Diary
You probably carry with you photos of people and things you care about. In your wallet, purse, or on your desktop you have photos of your wife, girlfriend, husband, children, dog, house, car. Now I also want you to carry the pictures of your trades, so that you get to know them intimately and understand them better than before. Creating and maintaining a Trading Diary is the best way to learn from your experience.
In February 2007 a variety of signals which we will discuss later in this book led me to become extremely bearish on the stock market. I went heavily short stocks and index futures, as well as long index puts. When the stock market collapsed, I was loaded with shorts. When my indicators signaled that a bottom was at hand, I spent hours taking profits, covering shorts. The next day, instead of going to the office, I worked from early morning until 2:30 PM documenting the trades I had just closed out. If I had to choose between my profit from catching that swing or having my Diary, I would choose the Diary! I can always make more profits if I continue to use my Diary, but without it profits can quickly turn to losses.
To maintain a Trading Diary, I suggest using two inexpensive and widely available programs. You can add them to whatever programs you already use for market analysis. One of them will help you capture and edit images, while the other will let you store and retrieve your diary records.
The best tool for taking pictures of your charts and making notes on them is a program called SnagIt. It makes it easy to capture images from any charting program, draw and write on them and paste them into your diary. Windows provides a PrintScreen utility for taking screen-shots, but nothing compares to the ease, versatility, and the sheer pleasure of using SnagIt (www.snagit.com). I use it almost daily for updating my Diary or sharing trading ideas with friends. Whenever we shoot each other an e-mail, we tend to send charts captured and marked up with SnagIt instead of writing long messages.
My program of choice for keeping a trading diary is Microsoft Outlook.1 This is a fantastically powerful program, but most people scratch its surface by using it only for e-mail. I’ve come to believe that Outlook is the best program for keeping myself organized, focused, relaxed, and in control—and not only in the markets, but for life in general.2
The instructions for using SnagIt and Outlook are included with both programs. The following comments touch upon just a few features of these programs.
Go to the Calendars tab in Outlook, create a new Calendar, and name it Trading. You can view any Calendar in a daily, weekly, or monthly format. I prefer a monthly format, which serves as a table of contents for all of my trades, both open and closed (see Figure 3.3). Lately, I have begun keeping two calendars—one for regular trades and another for long-term positions which stay open for months or even longer.
1I began keeping my first trading diary years ago in a large notebook. I used to print out black-and-white charts on a dot-matrix printer, cut them out and paste them into the notebook with double-stick tape, then mark up trading signals with colored pens. Years later I graduated to an electronic diary, creating a Word file for every trade. I found both diaries cumbersome to keep, and it was difficult to find something in Word when I wanted to look for an old trade. Finally, Kerry Lovvorn (www.kerrylovvorn.com), a camper who became my co-manager of the Spike group, showed me how to implement my diary using the power of Microsoft Outlook. It put me completely in control of my trading history. Later I met a number of traders who kept their diaries in a program called Lotus Notes.
2If you feel as if your work and paperwork are out of control, there are two books I highly recommend. In Getting Things Done, David Allen teaches a system for bringing simplicity and clarity into your life. In Total Workday Control, Michael Linenberger shows how to implement those principles in Outlook. I have read both books several times, took extensive notes, and implemented many of their recommendations. They had a strong positive impact on my life.
Figure 3.3 A Trading Diary in Outlook
See the description of the meanings of colors in Figure 3.4.
See the description of the meanings of colors in Figure 3.4.
Together with two trader friends mentioned elsewhere in this book, Kerry Lovvorn and Jeff Parker, we have created an Outlook add-on for keeping a Diary which we named AK-47. Initially, the three of us built it for ourselves, but then we offered it to the public, and you can see its description on www.elder.com.
Whenever you click on a calendar to create a new record for a trade, Outlook allows you to label that entry. The labels show up in the monthly view, and if you set a system of rules for coloring labels, each of them will carry a message (see Figure 3.4).
Most of my Diary entries include two charts—a weekly and a daily. Depending on the trade, I may also add a monthly or intraday chart. Figures 3.5 and 3.6 show a recent example of a Diary entry.
Figure 3.4 Labeling the Entries in a Trading Diary
A trader without a Diary is like a senile person. The poor man cannot learn anything: you can show him today how to zip his pants, but tomorrow he will forget again. Most losing traders are stuck, repeating the same mistakes over and over again. A Trading Diary helps you break out of that vicious circle. Maintaining and reviewing a Trading Diary will lift you to the level of a thinking and learning human being.
Now, before we move on to the next chapter, would you like to see my exit from that trade, shorting DB? We have already looked at my entry, but what if I told you I forgot how I exited? What if I waved my fingers in the air and told you that DB went down and I covered? How useful would that be to you?
Not very.
I hope that by now I have convinced you that it is essential tokeep a Trading Diary. Will you promise to keep one? If so, I’ll open my Outlook again and bring up the exit diary. Take a look at Figures 3.7 and 3.8.
Figure 3.5 Trading Diary—DB, Entry, Weekly Chart
The weekly chart shows the source of a trading idea—an e-mail from a friend who ran several market scans and shared the results with me. Diagonal red arrows mark bearish divergences. Thin vertical arrows show that the stock is prone to sharp drops. There is also a remark chiding myself for being a little too eager to enter. I was very bearish on the stock market and restless after missing an entry into a trade that came from my own scan.
You can see that the exit is also graded. Its 45% rating was not that great, but the trade grade was very nice. Taking over $9 profit on 1,000 shares was a good payday. See the note—“keep an eye on it to maybe short again.” The trade does not have to end when you exit a position. There is a lot to review, much to learn, and you can continue to make plans for the future. I hope that this exercise has helped convince you that it is important to keep a Trading Diary. You need to document your successes and failures and learn from both.
