A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Your Best Trading Tool Is Free
11/09/2011 1:45 pm EST
A properly designed trade journal can be a trader’s most useful tool, and Darren Miller explains how to track goals, learn what’s working and what’s not, and spot the dominant patterns.
I’m speaking with Darren Miller, and Darren, glad to have you here. Your Best Trading Tool Is FreeTell me the importance of having a trading journal.
I think it’s one of the most underutilized tools freely available to any market participant.
The importance that I see from a trading journal is that you can glean so much information from yourself and the way that you participate in the market. Often times you can go back and look at your trade history—your trade metrics, as they’re referred to—and see some strengths in your market participation.
You can also pick up on some of the details where, “Hey, maybe I shouldn’t have been trading on a Friday afternoon on option expiration,” or “Maybe I took a little bit too much risk here. My idea was correct and the stock went the direction that I thought it was going to go in, but it took a little bit more time and I may have had a little bit too much capital in that trade.”
You can kind of go through your history in your trading journal, find those themes, common threads, and improve upon the things that you’re doing right, and do away with the things that may be taking money out of your profit and loss.
What are the essential elements of a trading journal?
I think on the first page I think it’s important to put goals. I always tell people to start with goals and to be as specific and concrete as possible.
I often ask them to design what success looks like. If it’s on an individual trade, if it’s on a grander scheme of “Hey, I want to be a successful trader,” I’ll have them define that and then build some mile markers that will show them progress from day one to whatever day it is that they review their journal.
See related: The Right Way to Journal Your Trades
Is it more like a diary then?
It can be. We can all look at an equity curve and see if we’re doing good or doing bad, but you give that some voice and say “You know, this was a tough day in the market; this is what I did, and this is what happened.”
When you can go back and read that as a narrative, I think that it adds a lot more to your learning, for one, and I think that it will help you in the end improve upon the things you’re doing right and kind of sweep away and get rid of those things that are draining your equity curve.
How important is preparation before the trade?
I think a lot of people fail to prepare. They think that they can just sit down at their trading desk and click a button and start buying and selling stocks.
It’s like any job; you need to prepare for that. The market is unkind. If you’re not prepared, if you don’t know why the market is where it is and what the potential catalysts are for that day, you’re doing yourself a disservice. You need to walk into it so that you can make informed decisions.
So you’ve got the goal, you’ve got the plan, now the execution.
Yes, that’s the difficult part for a lot of people. Trading is about figuring out risks, how to manage it, and to do away with the uncertainty that’s there.
So as you do your homework and do the things that are going to allow you to make an informed decision, you still have to put your finger on the button and buy or sell.
Often times, people become frozen, and that’s when you may have something else going on that you may need to seek some professional help with, or take care of some other aspects of your life that may be interfering with your ability to make the decisions.
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