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Why Keep A Trading Journal?

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Journals help a trader to step back and think rationally about a potential trade...

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Individual traders are afforded many luxuries that large institutions or money managers do not have. They are not required to uphold a certain investment allocation, but rather can choose to be in the market one day, and out the next without regard to a governing set of rules. Most individual traders also have the ability of moving in and out of stocks very quickly without altering the normal market flow of that stock, leaving no tracks behind, whereas an institution may desire to make an investment in a company and have to do so over the course of several days, weeks or even months in order to efficiently put capital to work.

While I could continue to run down the list of all the benefits relating to an individual investor, there is something that I believe hinders the individual, which is a lack of accountability.

Regardless of how a prospectus may or may not be dressed up at the end of a quarter, the manager still must account for his actions amongst his colleagues and peers and has his performance measured daily. While most of the time it is a luxury for the individual trader to not have anyone looking in on their actions, it makes it very easy to stray from a set style or methodology without being held accountable by anyone and therefore not consistently being challenged to improve.

One of the ways a trader can bring in this component of accountability, should they desire to really work on improving their trading, is by keeping a detailed trade journal.

I have been a fan of trading journals for a long time and I chuckle to look back at my first trade journal, which was pretty much filled with quotes like "I like Microsoft (MSFT), it has good products, I think it goes higher. Bought 100 shares."

While I was sitting in the right church, I was definitely in the wrong pew as my attempt at keeping records was good, but a quick glance showed I had no real clue in what I was doing.

Thankfully, as time went on, my records became much better, and today, while I don't keep an actual journal because I relay publicly most of my trades, I am held accountable by those who choose to learn from me and read my musings.

Recently, this topic has become one of interest on my blog TickerVille.com and I thought it worthwhile to bring it up and dissect it a bit further.

Keeping a journal does a few things. First and foremost, it helps a trader to step back and think rationally about a potential trade. It may seem sexy and appealing to jump into a stock while it is on the move, but I have often found that a strategic plan of attack, with a longer holding time frame and methodical approach, can produce superior results.

Much of the alluring excitement can be contained by setting a rule that says you must write out your plan on the trade before you enter it and if you can't write out anything more than "It's on the move and I want in," chances are you should take a pass.

In addition to helping one calm down a bit, I have also found it very helpful to have a log of your trade strategy in the event it starts to go wrong. Most of the issues facing traders occur when they have a trade start going against them, and rather than cut it quickly, start to rationalize the position or change the strategy they had when they originally entered the trade in the first place.

Should you have a written record of this, it will be easier to stick to as we all know when that moment is that we change our ideas and start grasping onto hope.

Quite often individuals get into trouble because they lack a real plan when it comes to entering a trade. If asked, they may stumble about grasping onto a reason why they committed such capital and when the trade goes wrong, they actually start to research the company and form a new thesis, which is what they should have done in the beginning.

While I am sure there are many more benefits, the last I will discuss is that a journal often makes a wonderful motivational tool when you start to re-read previous posts and see how you have improved. Whereas my first journal took on the quality you saw above, a quick glance at an entry today can easily show how far I have come.

"Nvidia Corporation has been consolidating nicely since its July top. The recent year over year earnings jump of 76% with a forward estimate of $2.04 which is a forward P/E of 21 while the growth rate is 36% makes this stock look fundamentally attractive. Furthermore, I like how it has been setting up a high pennant and I will look to purchase shares on a break over $45.60."

It may sound tedious and cumbersome, but I honestly believe that for those seeking to dramatically improve their results, starting to keep a journal is the first step.

No positions in stocks mentioned.

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