How much do you know about your trading?



* Take the absolute value of your daily gains and losses and divide them by your total portfolio value. How much of your portfolio are you putting at risk each day on average? 1%? 3%? 50 basis points? How has this changed over time? How does this change when you're making money? Losing money?



* Take a look at the 10% of your largest trades (i.e., when you've taken the largest positions). Have those tended to be winning trades or losers? Do you have a greater edge when you're more aggressive or less?



* Take a look at your trading results as a function of day of week and as a function of time of day. Do you trade better at certain times than others? Take a look at how you start a day, week, or month: does this affect how you trade subsequently, and does that affect your overall profitability?



* Take a look at how long you hold winning trades vs. losing trades. Do you get out of winners quicker than losers? Do you have a small number of large losing trades that you hold well beyond your average holding time per position?



* Take a look at your trading results after a down day or a down week. Does being down affect your trading? Do you trade better or worse when you've lost money the day or week before? How about trading results after an up day or week? Do you trade better or worse when you've been making money?



As I emphasized in my performance book, all of these are metrics that you can keep in a trading journal to track what you're doing right in your trading and what needs improvement. Most traders don't have an objective picture of how well or poorly they're doing, because they don't track the drivers of their success or failure.



In my recent post, I mentioned two very nice resources for tracking your performance. Another tool you might want to consider to track your performance is the Trade Performance program developed by Steve Geringer. In addition to helping traders track their performance as a function of date ranges, security types, symbols, etc., Trade Performance doubles as a tool for journaling, trade planning, risk management, and business planning.



Steve is making a "lite" version of Trade Performance available to traders free of charge. This version contains much of the functionality of the standard version, with the exception of tax reporting and automatic importing of trade data. Screenshots of the program might help you figure out if the program would be helpful for you.



I work with quite a few professional traders. One thing that distinguishes them as professionals is that they keep score religiously. They know how much risk they're taking, how well they're performing, and whether their trading is better or worse than usual. That helps them make rapid course corrections, pull back their risk, and keep overall losses modest. If you don't work for a firm that keeps score for you, dedicated tools are worth looking into.



Some tools for tracking metrics, in addition to Trade Performance, include:

My recent posts have focused on using journals to improve trading . Everyone has a journal format that (one hopes) works best for them. Here I'll suggest a format that I find particularly useful.



The reason I'm offering the suggestion is that I continue to find that traders use journals in ways that are less than constructive. The greatest mistakes in journaling, I find, are:



1) Lack of Specifics - The journal contains vague, general intentions such as, "I need to trade less aggressively", without any indication of how the trader will accomplish this. If the intent is to trade less aggressively, then the journal should create a specific goal. An example from my own trading would be: "I'll enter positions with one unit and scale in with a second unit on the first pullback in NYSE TICK when my position is profitable." Notice how this makes the general intention so much more concrete. Now I have something constructive to implement and can grade myself on the implementation. If I only say, "I need to trade less aggressively", that's not goal-setting. That's Monday-morning quarterbacking, or me just wagging my finger at myself. Self-criticism by itself never improved anyone: it's self-criticism followed by constructive problem solving that does the trick.



2) Focus on Negatives - The worst journals are the ones that simply vent fear or frustration. They recite every bad or missed trade, everything that went wrong during the day. Not only is there an absence of constructive suggestions for improvement, but there is also an absence of ideas re: what the trader has done right. The idea is to learn from what you do right, not just what you do wrong. Indeed, focusing on strengths will enhance motivation and the sense of competence and efficacy. By staying exclusively problem-focused, it's all too easy to drain motivation and optimism.



So, how can we improve the above in a format for a trading journal?



My suggestion is starting the journal with a listing of your specific goal(s) for that trading day.

Those goals should be: a) chosen from your previous day's or week's trading; and b) taken from your trading rules. The goal should be either to improve a mistake you made, or to build upon something you did right. The goal should state specifically what you expect yourself to do during the coming day, so that you can rehearse the goal in your mind before the market opens and so that you can evaluate how you performed on the goal at the end of the day.



Notice that, before creating the journal, it's important to write out your trading rules in advance: everything that you want to follow to trade well. You can't hold yourself accountable for a rule that you don't create; that's perfectionism, and it's not helpful either. Rules should clearly state how you want to size positions, enter them, exit them, set stops, set exits, scale in and out of trades, etc. Your journal will track how well you follow these rules, not just whether you make money or not.



So you start with rules, notice when you do a particularly good or poor job following the rules, and then set goals for the next day based on the good or poor performance. The journal entry then gives yourself a grade at the end of the day for how well you performed on your goals and why you earned that grade. Include your daily P/L with your grade, so that you can quickly see how your performance rises and falls with your grades.



The journal keeps you constructive, keeps you learning, and keeps you working on the things that are most important. It is not a tool for simply rehashing the day or voicing your feelings; it is your tool for self-development: your means for coaching yourself.



RELEVANT POST:



When Coaching Works and Doesn't Work

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In my last post , we took a look at trading journals and how those can be used to improve performance. The report card format for journaling is particularly helpful for goal-setting, tracking progress, and recognizing patterns in our own trading. In this post, I'll review some of the patterns that most often appear across journal entries--and that are important to work on.



1) Patterns of Negative Self-Talk: These occur during frustrated moments in markets. We miss a trade, a trade blows through our stop, we give back our money on the day: all of these create frustration. This frustration then triggers an anger response that we direct toward ourselves. For example, we might find ourself saying, "Here it goes again! Other people are killing these markets, and I can't get it going." At that point, your frustration is no longer about the specific trade or market event, but is directed to *you as a person*. Trading should be about trading; not about you. After all, you wouldn't be boasting and crowing in the journal if the trade went your way. If you wouldn't like to hear your message coming from someone else (imagine your buddy at the workstation next to yours saying, "Whoa, dude, other people are killing these markets, and you can't get it going!") and if you wouldn't be speaking that way to your trading buddy, then you shouldn't be speaking that way to yourself. Interrupting that negative self-talk and turning your frustration toward a constructive kick in the pants ("C'mon, Brett, you know you shouldn't be trading so large in the chopfest. Let's stick with the rules!") can be very helpful in preventing frustration from snowballing.



2) Patterns of Impulsivity - Out of excitement, boredom, desire to regain profits, or overconfidence, you find yourself trading too frequently or with too much size. This, in turn, leads to uneven performance and outsized trading losses, which then produce discouragement. Many traders keep their goals--and their trading rules--taped to their screens; this helps keep them in the forebrain as a check on impulsivity. One trader I worked with actually had a brief checklist that he had to check off before placing any trade. This prevented him from acting hastily. If you can figure out the triggers that make you impulsive (sometimes these are winning trades, where you start playing with "house money"), you have a good chance to put on the brakes before you act on impulse.



3) Patterns of Fear - Particularly after losses, but sometimes after making money and being afraid of losing it, traders fail to act on good signals or do not size their trades adequately. The result is missed opportunity. Often this occurs if the trader is engaging in "catastrophizing": making a normal potential loss into something much larger. Worry, physical tension, and feelings of nervousness are great clues to track in a journal. Once you recognize your fear patterns, you can take some deep breaths, calm yourself, and focus on assessing opportunity (and focus on those trading rules). One way of breaking overwhelming fear after large losses is just to put on some small trades when your signals are good and get your rhythm and confidence back. Then you ramp back up to normal size in a gradual, but steady manner. Playing defense is not giving into fear: having rules about risk control and hanging onto a day's profits can help you distinguish the two.



Once you notice your patterns, it's easier to construct specific goals for the next day's and week's trade. The overarching goal is changing your patterns: controlling how you think and feel rather than having them control you. It's difficult to imagine changing your patterns if you're not aware of them in the first place!



RELEVANT POSTS:



Using Emotion to Change Emotion



Some 2007 Posts on Trading and Emotions

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