Winning is a Habit: Keep a Trading Diary
Once you have a trading framework or structure written down it allows you to focus just on your game plan. It gives you some direction on what you should be doing. In other words, if you have a framework to trade options on the US market then there is no point looking at CFD’s on the Australian market or four X trading on currencies, what you want to focus on is options on the us market.
Now, I’m not saying there doesn’t come a time when you want to expand your trading BUT you should only be doing so once, you have your trading well under control. Too many traders swap from instrument to instrument hoping to find the special secret one that’s going to hit home runs all the time….well to be honest, it just isn’t there. It is also important to note that one is not better than the other. Remember, it doesn’t matter what you trade, it’s how you trade it!
So you have your over all game plan written down.
Now a good place to put it is in what I call a Trading Diary.
A trading diary is basically a recorded journal of all the things you need to watch to trade according to your trading framework. So you have your plan, you now need to observe the market conditions to identify trading opportunities that fit your plan.
Write these observations down in your diary.
This should be on a daily basis and it always should be done when the market is closed.
Doing this type of work when the market is closed allows you to limit the impact of emotions and helps in reading the current market conditions without any bias.
What we want to do is to set ourselves up for the next trading day, with clear and precise objectives. (If xyz stock hits this price I will do this.)
But hey Simon, what do we actually look at?
Well, that actually depends on what market you are trading but here is an example…
Firstly, I record what I see in my charts. I actually write down what I see in my charts.
That’s on the Dow, Nasdaq, S&P 500.
Where is each day’s closing price is in relation to yesterdays?
Where is the close in relation to the indicators you use? I use moving averages but you may use Bollinger bands. So, you would record where the price closed in relation to the bands. Is it pushing on the top band? Has it broken through the middle band? Or, is it resting on the bottom band?
I also record the actual relationship of the moving averages I use. That tells me what direction the current trend is in and how strong it is.
Some other things I record are things like..
The advancing/declining issues, the up volume and the down volume, the new 52 week highs and the new 52 week lows and the Equity only put call ratio.
If you are day trading or short term trading, you may do the arms index or the trin.
I also look at what’s happening with the sentiment indicators: the vix, vxn and the qqv.
So don’t you think that once you do that, you would have a good understanding of the current market conditions? And, if you do that on a daily basis would it not make trading decisions easier?
Once I have an understanding of the current market conditions, I can then look at the charts of the open positions I’m holding. I do the same thing in relation to the closing price of the instrument I’m trading. Where is it in relation to my indicators and more importantly where is in relation to my individual trade plan for this trade?
I write down what action I will take if certain things happen the next trading day. For example, if it closes below my key moving average, or if it hits my profit target or trailing stop I will exit the trade.
That’s my open positions taken care of…I know exactly what I’m doing no matter what happens the next day.
I then go through my watch lists and write down any stocks that look like they are setting up for my entry triggers.
I tend to keep these in three separated columns, bullish, bearish or confused.
All that information then is ready for me when I go live into the market.
Do you think that sort of approach takes some of the emotion out of trading?
Keeping a training diary over a period of time helps us to see what’s happening in the market well before most of the other market participants.
When you make this a habit it starts to give you an inside view into the market.
It starts to develop an awareness or sixth sense of where the market is heading.
Now let me just stop on that point for a moment….It’s very important, in fact critical that we don’t make that awareness into a preconceived notion and get locked into thinking that the market will do what we think it will. That is a trader’s biggest blunder.
By keeping a trading diary as a habit will help us to look at the market objectively as each day we are adjusting to the actual current conditions as they happen.
That’s why……
Simon Says
Winning is a Habit!
