The importance of keeping a journal

optionMONSTER

Some of the biggest issues with trading involve skill acquisition and assessment. Research shows that getting better at most things, like playing the violin or skiing, comes through what Daniel Coyle calls " deep practice ": 10,000 hours of mistakes and learning to become the best.

That makes sense for physical skills and most mental tasks, including writing, math, and even poker. But trading is quite different.

Unless you are a high-frequency trader, it would be very hard to log anywhere near that many hours. (Staring at charts or tickers doesn't really count.) Trading is also rare in that you can be successful as a novice.

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Nevertheless, there are other things you can do to form a solid foundation for good trading. For me, that means having an edge in rules and risk management, as well as a method of assessment.

This is where a trading journal is invaluable. I highly recommend that traders write down all of the above, as you should be able to articulate your edge. You should have rules about the size of your trade and when you plan to get out of it--whether it is a winning or losing transaction. You should also write down your rationale for originating the trade and then examine whether it worked and why.

We at optionMONSTER have a hard assessment of our trading in terms of profit and loss. But that does little to tell the whole story of one's success.

Like most other ventures, good trading is about process, not outcome. Successful trading strategies and programs are profitable in the long term, even if they don't always make money. Many great traders are right only 50 percent or 60 percent of the time, so there will be plenty of instances when your P&L won't tell the whole story about whether you are successfully following your plans and processes.

My best strategies have come from reviewing my trading journals. It is quite easy to forget why we initiated a trade or which strategies are really working. The discipline of a journal can also keep you from acting impulsively and getting into bad positions--even without 10,000 hours of actual trading.

(A version of this article appeared in optionMONSTER's Advantage Point newsletter of April 5.)


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