“Don’t trust your memory, jot it all down,” Earl Schoaff.
You will never fix your mistakes until you learn what they are.
Success in trading requires planning, execution, and review. Today we focus on review. Reviewing your work as a trader will allow you to enhance and develop your strategies and trading systems. It will also let you to recognize your faults and correct your mistakes.
What does a quarterback do on Monday? He ices down his arm and watches the tape of yesterday’s game. He is looking for his faults, areas he can adjust and improve on. He is looking for his strengths, what are the areas he can continue to build upon.
The best part about trade journals?
This could be your first option trade or 1000th; a trade journal will continue to improve your profit.
If more profit and a stronger portfolio entice you, we will show you how a trade journal will help you achieve these goals. Unfortunately, a trade journal will not fill in itself, you will need to know what information to record and why. You will also need to know the best way to keep a journal, there are several options, and we will explore them in depth.
Planning And Execution
Before we can start reviewing our trades, we need to plan and execute them.
First, you must develop a trading plan. When you trade without a plan, you can get yourself into a predicament by entering positions and then having them move against you. You will be frozen like a deer in the headlights because you didn’t specify your exit or adjustment strategy ahead of time. When trading without a plan, you let emotion take over your decision making. It is impossible to leave emotion out of trading but allowing it to make the decisions for you is a great way to blow out your portfolio.
A proper trading plan doesn’t just help you in the rough times; it gives you a blueprint for your option strategy. It tells you what conditions must be met before you enter a position.
This plan should include when you are getting in, the strategy you will use, what your profit target is, adjustment levels are, the adjustments you are going to make, and your max loss. Now, this may seem like a long list to prepare before even making the trade but having this plan ready will keep you in the game longer.
You have your plan set. You see your conditions are being met in the market; you execute your trade.
Trade execution is the easiest part of options trading. With a proper plan, you should have a good idea of what and when to make trades. Items such as underlying, strategy, expiration and strikes should be laid out in your plan.
With most of the execution part taken care of for you, now you just need an order type to get the trade filled. Hint: Use a limit order, never a market order.
3 Reasons To Keep A Trade Journal
“A trading journal is one of the most effective tools for performance management,” noted TitanFX.
1. Performance record – You will record the open and closing of every one of your trades; naturally, this will develop into your historical trading record. For better or worse, a history of all your trades will allow you to go back in time and see how and when your options trading evolved.
A walk down memory lane is lovely, but how does it make you more money? Once you start to review your trading history, you can begin to see patterns emerge that you didn’t know existed. Did you trade too much after a loss, trying to make it back? Are you more profitable trading larger capitalization or more expensive stocks?
Maybe you make the most of your money before lunch. A great deal of information can be gathered by looking through your past performance. You can then use this information to refine your trading strategy, focusing on more profitable options strategies, times of day, or emotional states.
2. Real-time analysis – Trade journals are not only used to study the past; they are also used to analyze trades that are currently open. When trading options you need to record your Greeks, implied volatility, and changes in implied volatility.
With this information, you will be able to track changes in your positions and assess total portfolio risk. You don’t want your portfolio to be long delta if you think the market is going to drop. By having a clear view of your entire portfolio, you can make smarter trade decisions.
3. Outside Support – You’ve been recording your trades down in your trade journal, your trading has been improving, but it could still use some tweaks to make it better. Now that you have all your trades recorded finding outside help can be easy. A peer group, mentor, or trading coach will be able to look through your trade journal and see patterns that you may not have discovered.
What Should You Record In Your Journal
A journal is only as good as the information you put into it. Tradeciety hit the nail on the head, “A trading journal is not only a place where you store your past trades, but a good trading journal is your personal, professional trading mentor that shows you why you are losing money and what to change to become a better trade.”
Several rules you must follow when deciding what to record:
1. You can record too much information. A trade journal is supposed to be a helpful guide to profitability, not a daunting task that you dread at the end of the day. You want to record just enough information to help you make decisions.
2. Trade journals are not built into stone. What you start off recording doesn’t have to be what you record the entire time. Let your journal evolve as you evolve. Add more information as you see fit or take some information out that is useless.
3. Write in your journal at the end of the day. You want the data to be fresh, don’t try to catch up with your journal at the end of the week. Once the trading day is over, spend a couple of minutes and record your trades. Waiting till the end of the week will only cause the time it takes to fill out the journal to increase, making it more likely that you will not finish.
4. Review your trade journal regularly. How often you review your journal depends on the time of trading you are doing. Trading two or three positions a week on weekly options will give you more to evaluate than if you placed one trade a week on options that expire 60 days out. You should review your journal at least once a month, at the end of the quarter, and then a yearly review. If you trade a lot, review on Sundays for the week ahead.
When starting your trade journal here are some of the things you should record. Follow Rule #2 and adjust according to your needs.
- Entry Date and Exit Date, start with the dates. If you feel like you need to monitor the times of the day you trade the best or worst, add in time.
- Underlying Symbol – You have to know what your monitoring and have traded in the past.
- Option Strategy – There are a lot of different options strategies to choose from. Record which ones you use, you might see you are more profitable trading some strategies versus others.
- Entry Price and Exit Price – You may want to know what the underlying price was on entry and exit, but you should start with the entry and exit price for your option trade.
- The Greeks – Greeks are good to know if the position is still open, but they won’t do you much good if the position is closed.
- Implied Volatility – Implied volatility has a tremendous effect on the price of options. You should record what the opening implied volatility was and what it changed to when you exited the position. If you can't find these numbers, use IV Rank to give you a rough idea.
- Chart – If you are a technical trader, it is a good idea to have a picture of the chart you traded off of. A simple screen capture plugin or software can make grabbing these charts a breeze, or you can use StockCharts.com to easily markup and save the charts you need. Including a few words on the chart to show what you saw is always a good idea. You may remember why you made that trade a week from now, but are you going to remember in a year from now?
For your journal that covers all of the technical aspects of your trade. You can add or subtract columns as necessary depending on your strategy.
Perhaps you want to be an option seller, targeting deep out-of-the-money options. Recording information such as the probability of profit, cushion to breakeven, and strike price may need to go in your journal. Adapt your journal to your needs and let it work for you.
There is one last thing to add to your journal before you close it out.
Why did you make the trade, what were you thinking, what were you feeling? The why is the most crucial part. Anytime real money is on the table so are your emotions. You cannot merely check your emotions at the door and begin trading like a machine. We wish it were that easy. Don’t ignore your emotions, realize them, embrace them, and finally get them under control.
Did you close that position for a loss because you were scared that it was going to go lower? Write that down. Did you party too hard the night before, and now you are tired and groggy? Write that down.
Einstein said it best, “There are three great forces in the world: stupidity, fear, and greed." Those forces are always in play in the stock market. Know when they are present in your trades and decision making.
How To Setup A Trade Journal
There are lots of different ways to set up your trade journal. The important thing to do is find what works best for you. Trade journals are tools to help you become a better trader and make more money. The task of making a journal shouldn’t be difficult or time-consuming. The harder it is, the less likely you will stick with it, the less likely you will gain anything from it.
There are three ways to build a journal and each as their merit: paper, Excel, and software.
There is something to be said about using an actual journal for your trade journal. Nothing puts you more in touch with your trades than recording everything with paper and pencil. Journals are great for getting a feel for your trades as you write them down, but they are cumbersome. Of all the ways listed, they do require the most work. Calculations need to be made by hand, and simple copy and paste are out the door.
Another hands-on approach is Microsoft Excel. Excel is a great spreadsheet program that makes entry and calculations a breeze. Using Excel allows you to make changes to your journal easily, change what you record, and how you record it. Profit/loss, win percentage, risk numbers can be generated through the use of built-in formulas. A lot of brokerages, such as TD Ameritrade, will import data into your spreadsheet. The downside, Excel comes with a learning curve.
One of the easiest methods of journaling is with the use of software. There are a lot of different programs out there, but one of the best is TraderVue. TraderVue does the work for you. It easily imports your positions, does calculations and analysis for you, lets you add your notes to trades, and share your trades with the community or with your mentor.
It doesn’t matter if you use paper and pen, Excel, or software to keep your journal. The important part is that you keep a trade journal. Journals will allow you to review your past trades and current trades, look for trends and patterns, and keep your emotions in line.
First time traders and professionals can all benefit from a trade journal. You are never at the point in your trading where you are perfect, or your trading can’t be improved upon. Continue to work on your craft, and it will pay dividends for you in the future.
What information do you like to keep in your trade journal? Let us know in the comments.