Getting Organized – Are you a serious trader?
Trading is a business. Well at least it is for a professional. But not all people who trade the markets treat it as a business. Do you want to know if you’re a serious trader? Well here’s a simple litmus test. Can you tell me the entry date, price, size, total profit and loss, exit date and the reason behind why you made your last five trades? If the answer is no then you have a lot of room for improvement in getting organized.
I have coached hundreds of students over the past few years and one constant remains. The students I work with who keep good records do better on average than those who don’t. Record keeping can include many different areas. Those range from tracking your equity curve month to month, writing out your trading rules, and keeping a trading plan for each and every trade you enter.
Discipline is absolutely required if you expect to do well in the markets. Intelligence, education, common sense and a good approach help too. But you must be disciplined. In fact, if you’ll stay disciplined and out last the initial learning curve, you’re destined to succeed.
Let’s define discipline the following way: it is disciplined trading if you’re not trading emotionally, not over leveraging or trading against your trading system. The first step is to create a trading plan, write it down and follow it. The old adage of plan your trade and trade your plan fits perfectly here. So what information do you need to keep? And where do you keep these records?
Let’s deal with where first. I prefer to keep my records on my computer in a spreadsheet. It is easy to enter and keep organized. You can keep them in a notebook as well but if you do I’d recommend that you get a notebook that you set aside and only use for this purpose.
Some traders like to keep their records in the trading software they use or their brokerage account. You can make that work but one quick comment: being able to go back and look at your trade fills and executions is not the same as keeping a trading journal and writing out a trading plan for each trade. There are very real differences. First, it takes time to track down the old trades and figure out when and where you made the trade. Second, even when you do find them you may not remember the details of the trade and why you made it. Lastly, it just screams of laziness.
Once you decide where to keep the records the following information will be needed. Now this is a model and you can keep other information as well. But these are the basic components of each trade log.
- Trade Number
- Entry Date
- Long or Short
- Ticker
- Size
- Entry Price (including commissions)
- Total Cost Basis (the price multiplied by the size of the trade adding in commissions).
- Stop loss/Risk management plan
- Trade target. What is your goal in profit, pattern or underlying security price? How are you going to manage the trade as it moves?
- Pattern of the stock. Basic technical characteristics. This is kept for your own benefit so that when looking back in review you’ll remember some of the things you were looking at.
- Reasoning behind the trade. Why did you enter the trade?
- Exit Date
- Exit Price
- Total Gain or Loss
- Final Analysis. Did you execute the trade based on your trading rules? Did you learn anything from this trade?
Now you can retool this list to fit your personality and trading system. For example, if you’re an options spread trader you may want to include columns including maximum risk, margin requirements and such. But the basic framework above will work for most traders.
The most important thing to remember is that you’re putting in this work for your own benefit. Learning from our mistakes is vital. To be able to assess where we are making mistakes we need to log down our decisions.
When you enter the trade you’ll need to do some initial record keeping as you have seen above. But two of the most important things to write out are where you’re going to exit on profits or losses. This doesn’t have to be a specific decimal point but you better have a pretty good idea of what you expect to happen in the position. Stops and targets are two very important parts of the trading plan so we’ll discuss them in depth.
A stop loss is an order that you place with your broker that tells the broker when to exit your position. Stop losses can be set on any instrument and traders traditionally use them to mitigate risk. They are really important in a trading system. Some traders tend to set a mental stop, write one down on paper or in their trading log. This can work, but for most (especially those who won’t be watching the market) you’ll need to learn to place a stop on your trade through your broker.
Placing a stop loss is one way to mitigate risk as it gets you out before more losses occur. It’s not the only way. You also can control your risk through your position size, strategy selection and using vehicles like options and futures creatively to create hedges. If you’re new, you’ll want to focus on stops and position size.
If you decide not to set a stop you still need to write down in your trading log where you will exit the trade if it goes against you. In my experience, the types of trades that hurt accounts are when a trader refuses to sell it on a loss. The best advice I’ve ever been given in trading is to cut your losses short and let your profits run. Good trading requires that you sell losing trades. You can’t just hold them and hope for the best. Hope is a wonderful thing. It is not a trading plan.
Targets are set to have some picture of where we want to get out of the trades on profits. Now, you won’t want to run away from successful trades. Letting your profits run and develop is a very smart thing to do. It will be important that through your education you learn the signals to watch for as to when to get out. Setting an initial target is just a starting point that can and will be adjusted as the trade develops.
And finally, remember that keeping records and organization will help you become a better trader. It’s a sign of professionalism and keeps us focused on the task at hand. And that’s the bottom line.
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