Listen to this post
Ironically, the best tool to improve our performance comes from elementary school: a journal.
You may not keep a trading diary, or if you do, maybe you fail to keep up because you don’t see the value or you find it difficult.
Despite its simplicity, an honest log of your trades can provide a wealth of information and insights that you won’t find anywhere else.
Although I am referring to it as a “trading” journal, it’s immensely powerful for investors as well.
I want to help you craft one for your personal use and teach you how to analyze the information to improve your performance immediately.
First, I want to explain why it’s critical you create one.
Why You Should Keep A Trading JournalOne of the most common problems I hear from investors is they don’t understand why they aren’t making money.
In their mind, all the trades or investments they make seem fine.
Sure, there are one or two bad ones, but those shouldn’t impede account growth, right?
When these same people pull a transaction list from their broker, they often find
- They had more losses than they thought
- Their losses were greater than they thought
- They had fewer wins than they thought
- Their wins were smaller than they thought
But it’s so much more than that.
A journal can help us identify opportunities and risks before they happen.
For example, I am a big fan of selling put options on certain stocks like Tesla (TSLA). It’s a strategy I have employed many times this past year.
But Tesla is a notoriously volatile stock, so if I’m risking big, I want to make sure it’s worthwhile. The question is, how can I maximize my payout per dollar of risk?
Using my journal, I can analyze different trades and look for conditions that led to better payouts and performance.
How To Log Your TradesLet me start by dispelling a common misconception.
Trade journals don’t need to be cumbersome or difficult to manage.
In fact, you can keep one with pen and paper if you like (although I recommend an Excel workbook).
Most of us only need to include the following information:
- Ticker symbol
- Entry date
- Entry price
- Total shares or contracts
- Exit date
- Exit price
With the information above you can calculate useful statistics such as:
- Percentage of winning trades
- The average profit or loss per trade
- The average length of time in a trade
- Largest winning and losing trades
- Profit or loss by symbol, sector, or time period
For example, if you add your expected profit targets and stop losses for each trade, you can measure your average risk/reward ratio. This is also a great way to hold yourself accountable to another piece of advice I often give, which is to know your exit strategy before you enter the trade.
Whatever you choose to log should be something you can keep up with. Only keep information that adds value. There’s no reason to create a spreadsheet a mile long with data points you never use.
Analyzing Your PerformanceOnce you have created your trade log, it’s time to dig into the details.
First, I recommend scheduling a regular performance review.
Businesses do it with their employees all the time. And investing is a business, right?
You don’t need to do this more than once a month. However, I wouldn’t do it any less than that because you don’t want to get too far behind logging your trades.
When you perform your review, you’ll want to start by looking at a few key items:
- Profitability — Did you turn a profit or a loss? How does that compare to your prior reviews?
- Consistency — Was your performance consistent or driven by a few key trades?
- Market Conditions — Did you outperform or underperform the overall market?
- Trades — Did you enter or exit more or fewer positions than usual?
- Perspective — Does your performance align with your expectations?
As you start consistently evaluating your investment history using your journal, you’ll likely go through three stages:
- You’ll stop losing money.
- You’ll start turning a profit.
- You’ll start turning a larger profit.
What most of you will find in your journals is the key to getting through the first stage: taking fewer but better positions.
Focus on getting really good at one particular strategy or investment idea and work to squeeze everything you can out of it.
Then, begin to expand your horizons and look for new opportunities and different sectors.
If you struggle to pick one strategy or investment idea, a great place to start is TradeSmith Finance’s investment and trade screeners.
These are the same tools I use to look for timely and profitable trade and investment ideas.
Plus, you can set up watchlists and apply our entry and stop-loss signals to help you manage your trades.
What I love about trading journals is they create these “aha” moments.
We’ve all had them at some point.
I’m curious, what was your “aha” moment when something clicked into place, where your investing or trading career took a turn?
Reply to this email and let me know. I’d love to hear your stories.