Good Trading MUST Feel Un-Natural... Here's Why (Part 4)

01/18/2008 12:00 am EST

Focus: STRATEGIES

Barry Burns

Founder and Owner, Jaguar Trading

The #1 thing that helped me more than anything else, where it counts in making profits is:

Keeping a disciplined trading log!

That's it.

Here's what didn't matter much:

  • Which market I traded
  • Which time interval I used
  • Which indicators I used
  • Which moving averages were on my charts
  • Whose newsletters I subscribed to

What's ironic, and sad, is that most every trading course I bought encouraged me to keep a trading journal to log every trade I took, but I didn't do it. Why?

Frankly, I didn't really think about it that much. I just figured that I would know if the method of the course was working or not, because I'd be making money! Often I would start keeping a log of my trades, but it became cumbersome and I honestly couldn't see how keeping a record of my trades would make a difference in my profits. I believed the trading methodology either worked or it didn't, and me keeping a log wasn't going to affect my profitability.

I was dead wrong!

What I didn't realize was that the human element is a huge variable.  Way more than I imagined. Way, way, way more!

When I finally did start keeping a perfect, disciplined log of every trade I was absolutely shocked to see that I actually wasn't trading the methodology faithfully. I made little exceptions here and there, I got in and out of trades a little differently based on something I saw, or a hope or a fear, or based on a rule or pattern, I learned from a different trading course.

Bottom line-my trading was chaotic. Part of this was because I had no psychological tolerance for even small drawdowns. If I lost money for a day or two or three, I thought the method was junk, so I would try to "tweak" it and make it better.

I always thought I could make everyone else's method better. Not sure why I thought that since I wasn't a successful trader at that point. I was unjustifiably arrogant!

Just keeping a log of all your trades is not really going to change your profitability of course. The log must be used as a tool to make you profitable. You must learn how to analyze the log. A couple keys in the analysis are:

  1. Use the log as a mirror and face your series of consistent losers. We naturally tend to avoid looking at them, but the more you face them, over a long period of time, the more you will begin to distrust your own trading instincts. Remember, those instincts are the "herd" instincts of mass psychology (see Part 1), so by learning to distrust them, you are training your mind to think differently than the masses. But this only occurs when you prove to your brain, through massive repetition of facing the losses, that it is natural behavior with regard to the markets is wrong, wrong, wrong!
  2. Catalog your mistakes. Amateurs make the same mistakes over and over. Amazingly, this goes on year after year after year! Although they have a general awareness of their destructive behaviors, they are not aware of how pervasive those behaviors are in their trading. The truth is, those destructive patterns actually characterize their trading style, and they do not see that at all. The way to break this pattern is to confront it. Hold the mirror of the log up and see with your own eyes that you are making the same mistakes over and over and over.

Here's a key insight for you:

  • Amateur traders are always looking for ways to make more money
  • Professional traders are always looking for ways to make fewer mistakes

In my trading course I provide the same trading log that I personally use. But that's not enough. I also provide them with an initial list of the "7 Deadly Sins." These are the most common mistakes that traders make. That will get them started, but then I encourage them to add to the list the mistakes they find themselves making over and over until they develop their own customized list.

In the log, there's a spot to indicate which of the Deadly Sins they committed on every trade.

At the end of the week, students transfer their mistakes ("sins") from the daily logs onto a weekly log where they can see all mistakes from the entire week on one sheet of paper. Then they calculate how much money they made that week, and how much money they would have made if they simply avoided making those mistakes. 2 things jump off the paper:

  1. They are absolutely blown away by how many mistakes ("sins," trading rules broken) they made over the course of a week. The comment I hear over and over is: "I had a vague idea I was making some mistakes, but I had no idea I was doing them so consistently! I must be crazy!"
  2. They see the numbers in dollars and sense. If they did nothing other than avoid making the mistakes, they would instantly be a profitable trader making very, very good money!

Which brings me to one of my favorite trading axioms:

"Successful Trading is Simply a Matter of Not Making Mistakes."

So if you're going to make a New Years resolution for 2008, I'd encourage you to resolve to make a list of the most common trading sins, then commit yourself to the unglamorous discipline of logging every trade and documenting every mistake and committing to the process of systematically cutting them out of your trading behavior.

It's not fun, and most traders won't do it in a consistent, methodical and disciplined manner. But if you do it, that's exactly what will set you apart from the masses!

By Barry Burns of TopDogTrading.com

Related Articles on STRATEGIES