One often neglected part of trading is record keeping. Active traders probably know that the IRS requires us to file a Schedule D-1 with our tax returns detailing both short term and long term capital gains and losses and including the date acquired, the date sold, the cost or other basis, the sales price and the gain or loss. When I began trading many years ago, I was unaware of the need for this schedule and wound up spending several days going through confirmations of literally hundreds of option trades to fulfill the requirement. Now, of course, things are easier and we have programs like Excel and services like Gainskeeper that can take a great deal of the drudge work out of the process.
Putting aside the important implications of record keeping for tax returns, I also believe it is critically important and incredibly helpful to keep careful records of our own relating to our trades. I have become a serious believer in the value of some form of comprehensive trading journal or diary. The journal can be kept in many different forms such as notes made within a charting program, in a brokerage account site where available, or on individual pages devoted to specific trades. How it is done is a matter of personal preference, but whether it is done should not be an issue.
Amazingly I have witnessed some traders who had great difficulty going through sloppy records just trying to ascertain what positions they held. Little wonder that they were not successful. If we are going to become better traders, we must be attentive to what we are doing, have a plan and follow it. How can we analyze our mistakes and avoid repeating them if we don't have some way to evaluate what we have done and are doing?
In addition to recording what we are trading, before we even enter the trade, I think it is helpful to set out the reason for that entry into a position, the reason we are choosing a particular strategy (e.g. why are we buying the stock as opposed to buying a call or selling a naked put), the size of the position, how we assess the reward to risk at entry, and our exit strategy. At the conclusion of the trade, it seems equally important to record how we did. Did we follow our original exit strategy, for example, and if not, why not. Did we cut losses as intended? Did we let profits run? What gain or loss did we experience and how did that fit in our money management plan? In some fashion, we may even want to give the trade a grade like those we got in school.
Does all that seem like a lot of work? It really isn't, particularly if we take a step back and realize that trading and investing is a business unto itself even if we are not doing it full time. It is our money we are talking about here and I, at least, believe it is worth the effort to pay attention to what we are doing with it.
I am primarily a technical trader and use the discipline provided by things like moving averages, trend lines, MACD crossovers and the like so I use the chart as the underpinning for my own journal. When I enter a trade, I make a copy of the chart as it exists at the time of my entry and note on the chart what I did, why I did it, and my exit strategy. I then place that page in a 3 ring binder so it is facing like the left-hand page of a book. When the trade has been completed, I make a copy of the chart at that time and note on the copy how it closed and the profit or loss realized. I then put that page as a right-hand page in the 3 ring binder and review the two pages side by side to see how well I followed my plan and how well it worked and so I can grade myself. In this fashion, it is fairly easy to see mistakes so that I can attempt to avoid them in the future.
by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved
P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!
Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft
To comment on Bill's article click on the "comments" link below.