shall i show a tool?let us come to the point.
In order to succeed at trading, you must have an edge. Your edge begins with the knowledge you gain through your research and testing that a particular price pattern or market behavior offers a level of predictability and a risk to reward ratio that provides a consistently profitable outcome over time. Without it, one is just "playing" the market in order to have something to talk about on message boards. To get it, you have to know exactly what you're looking for and what to do with it once you've found it. This process is what the journal is all about.
The journal goes through several stages depending on where you are. Once you've decided where you want to concentrate your efforts (at this level, the journal may resemble a diary), then you begin the process of developing a system (or method, strategy, procedure, whatever you want to call it). Here the journal takes on a different character. Once you've developed a tentative/preliminary system, you begin testing/trading it, and the journal adopts a still different character.
The first step is to decide what kind of trader you want to be.
* What do you want to accomplish with your trading? Is it recreational? Supplementary income? A part-time job? Do you want to make a living at it? Even the greenest of the green knows whether or not he wants to make a living at it, trade only part time, trade for recreation, trade for the action, trade to have something to talk about with other traders (for whatever reason), trade only long enough to earn money to do or buy X.
* Do you have any idea what sort of trading is most comfortable? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping? (Note here that a short-term trader, for example, does not become a long-term trader just because his stop was hit and he didn't sell; a long-term trader doesn't become a short-term trader because he chickened out and sold too soon. Each of these approaches are selected deliberately and for thoroughly-considered reasons.) How patient are you? How adventurous? Are you a leader or a follower (most people think they're leaders)?
The second step is to decide what you're going to trade and when you're going to trade it.
* Have you found an instrument -- futures, stocks, ETFs, bonds, options -- that provides you with the range and volatility you require but also the safety that enables you to relax and trade in an objective and rational manner?
* Have you yet found a time (5m, hourly, weekly) or tick (1t, 200t) or volume (1K, 100K) interval that gives you enough trading opportunities but also gives you enough time to think about what you're doing? If you want to limit your trading to the "morning", are you physically and psychologically prepared to trade all day? If not, can you shrug off whatever opportunities you may miss by limiting the amount of time you spend trading?
The third step is to develop your system*.
A system consists of (a) a set of rules that you use to select profitable positions and (b) a set of rules that you use to manage the trade once you're in it. (*Note: again, whether you call it a system, a method, a strategy, a plan, a scheme, an approach, a procedure, or a modus operandi is not as important as sitting down and doing it.)
* Developing a system begins with deciding just what it is you're looking for. Therefore, begin by studying price movement in real time (or at the end of the day through "replay", if your charting program offers it). By "study", I mean to observe it with intent, not just read about it or listen to somebody talk about it. Note the conditions under which price rises, falls, drifts. Make every effort to avoid imposing your biases onto what you observe. You may see trading as a war, a competition, a game, or a puzzle. You may think you're out to kill somebody, outwit somebody, or are out only to detect the flow and slip into it, riding the waves as if you were sailing. None of this should be allowed to affect what you observe.
* Develop a set of preliminary hypotheses which exploit the profit opportunities presented by these movements, e.g. price began trending "here". Price broke out "there". Price reversed "there". What can I do to take advantage of that? What do I have to look for?
* Decide what strategy will best take advantage of what you think you've found. Are you looking to catch a reversal in the hopes that it will become a trend? Or are you looking to trade series of reversals within the day's or week's range? Or do you prefer to wait for a breakout and trade what may become a trend? Or would you rather wait for a retracement in what may be shaping up to be a trend? Limit yourself to only one strategy at the beginning.
Carefully define the setup which implements this strategy, preferably using old charts (attempting to define the setup by studying realtime charts is inefficient since you don't yet know what it is that you're looking for). This is called "backtesting". All else flows from this. Unless you know what you're looking for, you cannot test it, much less screen for it. If you have not tested it, you have no idea of the probability of its success. With no idea of the probability of success, any trades made are essentially guesses.
Therefore, focus on the setup. One setup. Determine its characteristics. Define it so specifically and so thoroughly that you can recognize it without any doubt whatsoever in real time. Decide provisionally where best to enter, what the target ought to be, where the stop should be placed, and so on. Only after the setup is defined and tested (and it can't, ipso facto, be tested until it's been defined) can one even begin to think about trading it with real money, much less trading multiple setups. Attempting to shortcut this process merely expands the amount of time it will take to develop the necessary skills. Nothing is gained by painting the house before scraping it, cleaning it, and priming it since you'll have to do it all over again sooner rather than later.
* Forward-test what you have so far, again using old charts, preferably replaying them (if replay is not available to you, then scroll through them, bar by bar). In other words, "pre-test" the setup. Make whatever modifications are necessary to the setup, i.e., re-examine and re-define your strategy. Address risk management, trade management, money management in further detail. Determine the ratio of winning trades to losing trades (you will, of course, have to define "winner" and "loser", which is where risk management and trade management come in). Determine the ratio of profit to loss. Determine the maximum loss. Determine the maximum number of consecutive losers.
Note that beginners often use "win/loss" to combine two separate considerations into one, and failing to keep them separate can create problems. One is win:lose. The other is profit:loss. Between the two, the "lose" and the "loss" have two distinct meanings. Win:lose refers to the ratio of winning trades to losing trades. Profit:loss means, expectedly, the ratio of profit to loss.
You'll read that the % of winners can be less than the % of losers as long as the winners are sufficiently profitable, one's management is superior, etc. And, yes, theoretically, one can "win" less than 50% of the time if his profits sufficiently outweigh his losses. But if your real-time real-money test begins with a string of the losses anticipated by your backtest, you'll be out of the game almost before it begins. In fact, one can be left high and dry even if his % of wins outnumber his % of losses, as mentioned above, if there is insufficient control of the amount of loss OR if the losses occur in sufficiently high numbers at the beginning of the trial.Then there are commissions and assorted trading costs to take into account, which is why traders who actually trade find that, without size, all the postulations about percentage don't mean much in practice.
* Paper-trade this plan, in a simulated environment, as a semi-final test, until you are satisfied that it performs at least as well as it did during the previous testing phase. This may take several months or more depending on how many trials you perform. If your plan is not consistently profitable, go back however many steps are necessary to arrive at a potential solution. (See also Making High Probability Trades.)
* Trade the plan using real money in real time, spending only what is absolutely necessary on "tools" and trading the minimum number of shares, contracts, etc., allowable. If your plan is not consistently profitable, go back .however many steps are necessary to arrive at a potential solution. Recalculate your win rate and profit:loss ratio on a continuing basis.
* If your plan is consistently profitable in practice, increase your size to what is a comfortable level, maintaining a continuous loop of re-appraisal and re-evaluation. When things come unglued, back up as far as necessary to regain your footing.
Novices rarely do any of this. They borrow something from somebody or somewhere and perhaps modify it somewhat, but they rarely go through the defining and testing process themselves. Some just try whatever seems like a good idea and hope for the best.
If one has absolutely no idea where to begin, there is nothing wrong with using a canned strategy IF it is used only as a point of departure. In other words, the canned strategy, regardless of what it is or what claims are made for it, still has to be tested, which often entails taking what is unexpectedly vague to begin with and defining it to a level of specificity that enables the testing to take place (it should come as no surprise that those who do go through the process succeed and those who don't, struggle, often to the point of being driven out of the market). Examples of canned strategies that are reasonably well-defined include the Darvas Box, the Ross Hook, the Opening Range Breakout, O'Neil's Cup With Handle, Dunnigan's One-Way Formula. Some of these are more vague than others and will require considerable work on definition before they can be tested. But they serve as points of departure
A journal should be more than just a trading log – bought here, sold there, made this, lost that. It should be a record of your journey (that's why it's called a "journal"). If done correctly, a journal will reveal patterns. Patterns of what you're doing right and what you're doing wrong and when and how often and under what circumstances. Patterns of the behaviors of those who are trading your stock (bond, fund, option, whatever). Patterns of the market you're trading, of its cycles, of its stages, of what works at some stages and in some cycles and not in others. It will reveal much regarding your trading. It will also reveal much regarding your self.
Addressing the questions asked in Part One and defining and testing the setup are only the preliminaries. Eventually, one starts trading, if only on paper, and that is where the journal can make the difference between success and failure.
A journal is not just a record. It is also a plan. Before the first trade is ever made, even if only on paper, prepare for the day. Note any events that you should be aware of (reports, press releases, meetings, speeches, testimony, nuclear explosions, approaching meteors, etc). Write down reminders of any elements of the trading plan that you're having trouble with and what you intend to do about them, e.g., “don’t take any trades anywhere but at support or resistance” or “be wary of wide-range bars” (this may be necessary as early as the afternoon of the first day).
Above all, record your justification for each and every trade. Record your thoughts before, during, and after the trade, written in real time* (your perception of what looks to you like a potential setup will change substantially after the “setup” resolves itself, and when you ask, later, “what the hell was I thinking?”, your record of your thoughts -- your "self-talk" -- will tell you, so that the next time, in real time, you’ll have a deeper and more rational perspective). This is more than just the reason for the trade (“It looked like it was going to go up”). It is more than the rationalization (“It was time for it to go up”). It is more than the mystic prompt ("I felt it was going to go up"). It’s the justification for it, the explanation that one would provide to one’s boss or client if he were trading for someone else. If everyone wrote down the reasons behind and justifications for every trade, their learning curves would be accelerated dramatically.
*
At the end of the day, review your decisions. Did you make good trading decisions, i.e., did you follow your rules or not? If you followed your rules but made one or more losing trades anyway, do any of your rules need to be re-examined? If you didn’t follow one or more rules, which do you most often fail to follow? What’s the problem? What did you say to yourself at the time? What do you need to work on the following day? Always, what could you have done differently to improve the outcome? Can it be tested to find out if it's only an occasional anomaly or worth incorporating into the system?
And then you write down your detailed plan for the next day . . .
Everywhere there are people telling us that this path or that path is the one we should take. How are we to decide? Most of us end up stumbling along through a trial and error exploration of various systems, methods, techniques, and whatnot. Some of us find something that works. A great many do not, and quit in frustration, or broke. (John Forman)
Make journals a part of the daily routine – Even if you don’t trade on a particular day, it is valuable to review the day’s setups and behavior at key price levels. Reviewing patterns on different time frames can also help traders internalize the context of the markets they are trading, as well as the interrelationships among those markets. The French scientist Louis Pasteur observed that, in matters of observation, “chance only favors prepared minds”. Replaying market days, reviewing your own performance, and identifying missed opportunities prepares you for future performance, as your increasing familiarity with trading patterns sensitizes you to them in real time.
Incorporate specifics in your journals – If I had to identify the single most common shortcoming among trading journals, it would be their absence of detail. Entries such as, “I lost my discipline; I have to be more patient,” might be nice as post-it reminders, but are inadequate as journal entries. Journals need to clearly state what happened, your assessment of why it happened, and the specific steps you intend to take to deal with the situation in the future. A good rule is that anyone reading your journal should be able to identify and follow the exact same steps that you intend to take in the future. Your journal should be a planning document, not a statement of intentions.
Wherever possible, review your journal entries with a valued colleague or mentor – When I established a training program for new traders, one of my first steps was to insist upon daily review of trading journals. This required me to create a trusting and constructive environment, so that traders would be honest in their entries. Once that openness developed, the daily reviews became proactive planning sessions (usually shortly before the start of the trading day) that addressed issues before they could damage the profit/loss statement. Even more important, the daily review created expectations of accountability, as traders knew that my inevitable question would be, “How did you do with your goals for the day
Use journals to review positive trading performance, as well as problems – The number two shortcoming among journals is their focus on problems to the exclusion of solutions. If journals become a mere recounting of one’s flaws and inadequacies, traders will inevitably lose interest in them. Traders can learn as much from what they do right as from their errors. My favorite instruction to new traders is to highlight in their journals one thing that they did right the previous day that they want to replicate today and one thing that they could improve upon in today’s trading. This forces traders to stay in touch with their strengths, as well as their failings.
Each journal entry should include material about the markets and material about the trader – It is not unusual for traders to emphasize one at the expense of the other. The core concept I stress with traders is that of pattern recognition. Traders display patterns in their behaviors: some of these are positive; others interfere with profitability. Markets enact their patterns as well; it is the trader who can see these as they emerge and act quickly that has the best chance of long-term success. Including material about trading patterns and traders’ patterns makes the journal a learning tool about oneself and the markets
OILMAN5
In order to succeed at trading, you must have an edge. Your edge begins with the knowledge you gain through your research and testing that a particular price pattern or market behavior offers a level of predictability and a risk to reward ratio that provides a consistently profitable outcome over time. Without it, one is just "playing" the market in order to have something to talk about on message boards. To get it, you have to know exactly what you're looking for and what to do with it once you've found it. This process is what the journal is all about.
The journal goes through several stages depending on where you are. Once you've decided where you want to concentrate your efforts (at this level, the journal may resemble a diary), then you begin the process of developing a system (or method, strategy, procedure, whatever you want to call it). Here the journal takes on a different character. Once you've developed a tentative/preliminary system, you begin testing/trading it, and the journal adopts a still different character.
The first step is to decide what kind of trader you want to be.
* What do you want to accomplish with your trading? Is it recreational? Supplementary income? A part-time job? Do you want to make a living at it? Even the greenest of the green knows whether or not he wants to make a living at it, trade only part time, trade for recreation, trade for the action, trade to have something to talk about with other traders (for whatever reason), trade only long enough to earn money to do or buy X.
* Do you have any idea what sort of trading is most comfortable? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping? (Note here that a short-term trader, for example, does not become a long-term trader just because his stop was hit and he didn't sell; a long-term trader doesn't become a short-term trader because he chickened out and sold too soon. Each of these approaches are selected deliberately and for thoroughly-considered reasons.) How patient are you? How adventurous? Are you a leader or a follower (most people think they're leaders)?
The second step is to decide what you're going to trade and when you're going to trade it.
* Have you found an instrument -- futures, stocks, ETFs, bonds, options -- that provides you with the range and volatility you require but also the safety that enables you to relax and trade in an objective and rational manner?
* Have you yet found a time (5m, hourly, weekly) or tick (1t, 200t) or volume (1K, 100K) interval that gives you enough trading opportunities but also gives you enough time to think about what you're doing? If you want to limit your trading to the "morning", are you physically and psychologically prepared to trade all day? If not, can you shrug off whatever opportunities you may miss by limiting the amount of time you spend trading?
The third step is to develop your system*.
A system consists of (a) a set of rules that you use to select profitable positions and (b) a set of rules that you use to manage the trade once you're in it. (*Note: again, whether you call it a system, a method, a strategy, a plan, a scheme, an approach, a procedure, or a modus operandi is not as important as sitting down and doing it.)
* Developing a system begins with deciding just what it is you're looking for. Therefore, begin by studying price movement in real time (or at the end of the day through "replay", if your charting program offers it). By "study", I mean to observe it with intent, not just read about it or listen to somebody talk about it. Note the conditions under which price rises, falls, drifts. Make every effort to avoid imposing your biases onto what you observe. You may see trading as a war, a competition, a game, or a puzzle. You may think you're out to kill somebody, outwit somebody, or are out only to detect the flow and slip into it, riding the waves as if you were sailing. None of this should be allowed to affect what you observe.
* Develop a set of preliminary hypotheses which exploit the profit opportunities presented by these movements, e.g. price began trending "here". Price broke out "there". Price reversed "there". What can I do to take advantage of that? What do I have to look for?
* Decide what strategy will best take advantage of what you think you've found. Are you looking to catch a reversal in the hopes that it will become a trend? Or are you looking to trade series of reversals within the day's or week's range? Or do you prefer to wait for a breakout and trade what may become a trend? Or would you rather wait for a retracement in what may be shaping up to be a trend? Limit yourself to only one strategy at the beginning.
Carefully define the setup which implements this strategy, preferably using old charts (attempting to define the setup by studying realtime charts is inefficient since you don't yet know what it is that you're looking for). This is called "backtesting". All else flows from this. Unless you know what you're looking for, you cannot test it, much less screen for it. If you have not tested it, you have no idea of the probability of its success. With no idea of the probability of success, any trades made are essentially guesses.
Therefore, focus on the setup. One setup. Determine its characteristics. Define it so specifically and so thoroughly that you can recognize it without any doubt whatsoever in real time. Decide provisionally where best to enter, what the target ought to be, where the stop should be placed, and so on. Only after the setup is defined and tested (and it can't, ipso facto, be tested until it's been defined) can one even begin to think about trading it with real money, much less trading multiple setups. Attempting to shortcut this process merely expands the amount of time it will take to develop the necessary skills. Nothing is gained by painting the house before scraping it, cleaning it, and priming it since you'll have to do it all over again sooner rather than later.
* Forward-test what you have so far, again using old charts, preferably replaying them (if replay is not available to you, then scroll through them, bar by bar). In other words, "pre-test" the setup. Make whatever modifications are necessary to the setup, i.e., re-examine and re-define your strategy. Address risk management, trade management, money management in further detail. Determine the ratio of winning trades to losing trades (you will, of course, have to define "winner" and "loser", which is where risk management and trade management come in). Determine the ratio of profit to loss. Determine the maximum loss. Determine the maximum number of consecutive losers.
Note that beginners often use "win/loss" to combine two separate considerations into one, and failing to keep them separate can create problems. One is win:lose. The other is profit:loss. Between the two, the "lose" and the "loss" have two distinct meanings. Win:lose refers to the ratio of winning trades to losing trades. Profit:loss means, expectedly, the ratio of profit to loss.
You'll read that the % of winners can be less than the % of losers as long as the winners are sufficiently profitable, one's management is superior, etc. And, yes, theoretically, one can "win" less than 50% of the time if his profits sufficiently outweigh his losses. But if your real-time real-money test begins with a string of the losses anticipated by your backtest, you'll be out of the game almost before it begins. In fact, one can be left high and dry even if his % of wins outnumber his % of losses, as mentioned above, if there is insufficient control of the amount of loss OR if the losses occur in sufficiently high numbers at the beginning of the trial.Then there are commissions and assorted trading costs to take into account, which is why traders who actually trade find that, without size, all the postulations about percentage don't mean much in practice.
* Paper-trade this plan, in a simulated environment, as a semi-final test, until you are satisfied that it performs at least as well as it did during the previous testing phase. This may take several months or more depending on how many trials you perform. If your plan is not consistently profitable, go back however many steps are necessary to arrive at a potential solution. (See also Making High Probability Trades.)
* Trade the plan using real money in real time, spending only what is absolutely necessary on "tools" and trading the minimum number of shares, contracts, etc., allowable. If your plan is not consistently profitable, go back .however many steps are necessary to arrive at a potential solution. Recalculate your win rate and profit:loss ratio on a continuing basis.
* If your plan is consistently profitable in practice, increase your size to what is a comfortable level, maintaining a continuous loop of re-appraisal and re-evaluation. When things come unglued, back up as far as necessary to regain your footing.
Novices rarely do any of this. They borrow something from somebody or somewhere and perhaps modify it somewhat, but they rarely go through the defining and testing process themselves. Some just try whatever seems like a good idea and hope for the best.
If one has absolutely no idea where to begin, there is nothing wrong with using a canned strategy IF it is used only as a point of departure. In other words, the canned strategy, regardless of what it is or what claims are made for it, still has to be tested, which often entails taking what is unexpectedly vague to begin with and defining it to a level of specificity that enables the testing to take place (it should come as no surprise that those who do go through the process succeed and those who don't, struggle, often to the point of being driven out of the market). Examples of canned strategies that are reasonably well-defined include the Darvas Box, the Ross Hook, the Opening Range Breakout, O'Neil's Cup With Handle, Dunnigan's One-Way Formula. Some of these are more vague than others and will require considerable work on definition before they can be tested. But they serve as points of departure
A journal should be more than just a trading log – bought here, sold there, made this, lost that. It should be a record of your journey (that's why it's called a "journal"). If done correctly, a journal will reveal patterns. Patterns of what you're doing right and what you're doing wrong and when and how often and under what circumstances. Patterns of the behaviors of those who are trading your stock (bond, fund, option, whatever). Patterns of the market you're trading, of its cycles, of its stages, of what works at some stages and in some cycles and not in others. It will reveal much regarding your trading. It will also reveal much regarding your self.
Addressing the questions asked in Part One and defining and testing the setup are only the preliminaries. Eventually, one starts trading, if only on paper, and that is where the journal can make the difference between success and failure.
A journal is not just a record. It is also a plan. Before the first trade is ever made, even if only on paper, prepare for the day. Note any events that you should be aware of (reports, press releases, meetings, speeches, testimony, nuclear explosions, approaching meteors, etc). Write down reminders of any elements of the trading plan that you're having trouble with and what you intend to do about them, e.g., “don’t take any trades anywhere but at support or resistance” or “be wary of wide-range bars” (this may be necessary as early as the afternoon of the first day).
Above all, record your justification for each and every trade. Record your thoughts before, during, and after the trade, written in real time* (your perception of what looks to you like a potential setup will change substantially after the “setup” resolves itself, and when you ask, later, “what the hell was I thinking?”, your record of your thoughts -- your "self-talk" -- will tell you, so that the next time, in real time, you’ll have a deeper and more rational perspective). This is more than just the reason for the trade (“It looked like it was going to go up”). It is more than the rationalization (“It was time for it to go up”). It is more than the mystic prompt ("I felt it was going to go up"). It’s the justification for it, the explanation that one would provide to one’s boss or client if he were trading for someone else. If everyone wrote down the reasons behind and justifications for every trade, their learning curves would be accelerated dramatically.
*
At the end of the day, review your decisions. Did you make good trading decisions, i.e., did you follow your rules or not? If you followed your rules but made one or more losing trades anyway, do any of your rules need to be re-examined? If you didn’t follow one or more rules, which do you most often fail to follow? What’s the problem? What did you say to yourself at the time? What do you need to work on the following day? Always, what could you have done differently to improve the outcome? Can it be tested to find out if it's only an occasional anomaly or worth incorporating into the system?
And then you write down your detailed plan for the next day . . .
Everywhere there are people telling us that this path or that path is the one we should take. How are we to decide? Most of us end up stumbling along through a trial and error exploration of various systems, methods, techniques, and whatnot. Some of us find something that works. A great many do not, and quit in frustration, or broke. (John Forman)
Make journals a part of the daily routine – Even if you don’t trade on a particular day, it is valuable to review the day’s setups and behavior at key price levels. Reviewing patterns on different time frames can also help traders internalize the context of the markets they are trading, as well as the interrelationships among those markets. The French scientist Louis Pasteur observed that, in matters of observation, “chance only favors prepared minds”. Replaying market days, reviewing your own performance, and identifying missed opportunities prepares you for future performance, as your increasing familiarity with trading patterns sensitizes you to them in real time.
Incorporate specifics in your journals – If I had to identify the single most common shortcoming among trading journals, it would be their absence of detail. Entries such as, “I lost my discipline; I have to be more patient,” might be nice as post-it reminders, but are inadequate as journal entries. Journals need to clearly state what happened, your assessment of why it happened, and the specific steps you intend to take to deal with the situation in the future. A good rule is that anyone reading your journal should be able to identify and follow the exact same steps that you intend to take in the future. Your journal should be a planning document, not a statement of intentions.
Wherever possible, review your journal entries with a valued colleague or mentor – When I established a training program for new traders, one of my first steps was to insist upon daily review of trading journals. This required me to create a trusting and constructive environment, so that traders would be honest in their entries. Once that openness developed, the daily reviews became proactive planning sessions (usually shortly before the start of the trading day) that addressed issues before they could damage the profit/loss statement. Even more important, the daily review created expectations of accountability, as traders knew that my inevitable question would be, “How did you do with your goals for the day
Use journals to review positive trading performance, as well as problems – The number two shortcoming among journals is their focus on problems to the exclusion of solutions. If journals become a mere recounting of one’s flaws and inadequacies, traders will inevitably lose interest in them. Traders can learn as much from what they do right as from their errors. My favorite instruction to new traders is to highlight in their journals one thing that they did right the previous day that they want to replicate today and one thing that they could improve upon in today’s trading. This forces traders to stay in touch with their strengths, as well as their failings.
Each journal entry should include material about the markets and material about the trader – It is not unusual for traders to emphasize one at the expense of the other. The core concept I stress with traders is that of pattern recognition. Traders display patterns in their behaviors: some of these are positive; others interfere with profitability. Markets enact their patterns as well; it is the trader who can see these as they emerge and act quickly that has the best chance of long-term success. Including material about trading patterns and traders’ patterns makes the journal a learning tool about oneself and the markets
OILMAN5