Make a list of every trade you have ever entered, and accept your losses.
When I returned to my trading desk from a month off, to say I was ready to go would be a huge understatement. I had new ideas, renewed enthusiasm and a very positive outlook. Which quickly crumbled when I began Step Two.
Instead of moving forward into new territory, I decided that I first had to review my past trades in an effort to find any obvious mistakes.
First, from my online broker, I downloaded a list of every trade I’d entered. This was quite possibly the most difficult thing I’ve ever had to do as a trader. It’s called emerging from denial, and accepting your losses.
I had never seen all of my trades lined up before and it was a very difficult thing to accept. The eagerness I had felt returning to my trading desk had instantly evaporated. Left in its wake was anger, confusion, depression.
I had lost so much money — nearly half of my account. I had traded recklessly, and for all of the wrong reasons, and here were the trades to prove it.
From here, I decided that, instead of simply reviewing this downloaded list of trades, I should type each one into my own Excel spreadsheet. This would accomplish two things.
First, it would give me a chance to connect with each trade and truly accept my losses. And second, it would give me the opportunity to discover what I was doing wrong and also what (if anything) I was doing right.
Now, was my Trade Journal a complex document filled with rows upon rows of data and complex equations? No. It took no more than five minutes to create, and it looked exactly like this:
As you can see, this is no exercise in intricacy. It’s a bare bones, simple Trade Journal and it’s that way for a reason. To keep my attention directed and focused when I’m looking at it while allowing me to scan all of the data I need nearly instantaneously in the same way my trades register in my mind.
What – when – how much – how long – win or lose? Short, sweet, and very to the point.
You will find a full size blank Trade Journal in the appendix. Copy the format into Excel and create your own list for review.
You do this by typing each of your trades into your Trade Journal spreadsheet one by one. All of them. I cannot overstate the importance of this. If you simply download your trades from your broker directly into the spreadsheet you will be missing the heart of the exercise. By typing them in you will have to focus on each trade individually. Where you entered. Where you exited. Why.
At first I thought this would be a mind numbing exercise in redundancy. Luckily for me it turned out to be the exact opposite. The Trade Journal drew me in and held me captivated for well over a week as I typed in each and every one of my trades, going over them in my mind, looking for patterns, for glaringly obvious mistakes.
It truly was a surreal moment. For years I had been studying the trading habits of gurus and professional traders, and now here I was, studying my own. And when I was done I had a document I was very proud of. It was the first, professional trading document of my new trading self. I felt like I was in business, and it was only the beginning!
Reviewing that very first Trade Journal, immediately I noticed one very obvious fact — if I had not traded at all that year, the money I would have saved on commissions alone would have covered nearly HALF of my trading losses. Ouch!
And that was no isolated year.
Sure, these losses could have been chalked up to the price of education, but that was part of the problem — I WASN’T GETTING ONE! I was doing the same things over and over gain. And none of it was working.
THINK ABOUT IT: Are your trades working? A quick way to tell is if your equity curve slopes up or down. If it slopes up what you are doing is working. If it slopes down, there is no mistaking that your efforts are not profitable. There is no hiding from it. Which is fine. Because if you could hide from it there would be no opportunity to grow.
So go ahead, download a list of each and every one of your trades from your broker, type it up into your own Trade Journal, and accept your losses. I guarantee this will be an amazing experience that will change the way you trade forever.
REVIEWING YOUR TRADE JOURNAL
Okay, did you do it? Did you download the list, type up your journal, and accept your losses? I hope you did. These steps are very powerful steps, and they can revolutionize your trading forever, but not if you don’t do them.
At this point, what you should have in your possession is a chronological list of every stock you have ever traded. From beginning to end. You have the profit, the loss, the exit and the entry date of each of your trades, and you have a customizable spreadsheet onto which you’ve typed them.
How does it feel? Are you overwhelmed? Angry? Excited? Did you do better than you thought, worse than you thought, about the same?
After reviewing my own Trade Journal I quickly decided that active trading was a waste of time and money (for me) and that, if I was going to continue trading and design a trading system around criteria that matched my personality, the first thing I would need was a system that generated far fewer trades and less commissions. I also realized that this style of trading, while good for me, would not be good for everyone. It was the first time I realized that you have to match your trading style to your personality, and work from there. Of course! Why hadn’t I thought of this before? I had been trying to day trade because I thought that way was the fastest way to make money. I had also bought into the fear of holding positions over night and how devastating it can be if they open against you (something I later debunked through backtesting). Never mind that I a have a very laid back personality and the grueling pace of day trading was wearing me out. Never mind that my account wasn’t the largest account ever traded and that the commissions were chewing it up bit by bit. Never mind that I preferred daily charts over intra-day charts. In light of this, I quickly added another item to my list.
DAVID’S LIST #4
1. Remove emotions from your trading – however you can.
2. Never place a trade without a clear, well defined plan which
includes entry/exit/stop-loss/profit target/risk assessment.
3. Know why you’re in the market — you are here to make money.
4. Trade a style that matches your personality.
Amazing! I was less than two weeks into my post meltdown trading analysis and already I had come so far. I was eager for more, and, as you’ll see, more is what I got.
TRADE JOURNAL ANALYSIS
Now that you’ve reviewed your Trade Journal and accepted your losses, it’s time to start looking at the information in different ways. This is an amazing tool, but it won’t work if we don’t use it properly.
The first thing you’ll want to do is print your Trade Journal, just the way it is, and carry it with you everywhere you go. Now, when I say everywhere, do I really mean everywhere? Yes, I mean everywhere. Out to dinner. To the movies. To work.
If you want you can print out extra copies, and keep one in each of these places, but it’s much better if you print out one Trade Journal and carry that list with you. What are we going for here? One thing: complete and total immersion.
When it comes to your Trade Journal I want you to know every inch of it by heart. I want you to live with it, learn from it, bond with it! And the more you look at it the better. As a matter of fact I want you to tune out all other market information at this time. Don’t worry, it will be there when you get back. And seeing as you have stopped trading you don’t have any positions that you should be worrying about.
I am very serious about this. It should be you and your journal and nothing else. Instead of looking up stock quotes, look at your journal. Instead of reading The Wall Street Journal, read your journal.
And what exactly are you looking for? Anything that stands out! Any patterns. Any chunks of losses. Any profits. Study the days that you trade the heaviest and the days that you trade the lightest. Study the amount you trade and ask yourself if that’s an amount you are comfortable with. Do you flip flop from day trading to swing trading? Are choosing your position sizes randomly? What about average losses and gains? Are they all over the place? An easy way to do this is to create two more lists. No, you will not have to reenter the same information again. You will simply have to reorganize it on your spreadsheet which I will show you how to do. First we want to organize the list by winners and losers. Below you will find the example of my Retail Resumption Trade Journal.
This system trades stocks found in the Russell 1000 that have gained 10 percent over the past month but have sold off over the last few days. It goes long the morning after an inside day (a day where the high is less and the low is greater than the previous trading day) is registered and sells after a 5% profit target has been reached or a 10% stop. Does this seem backwards, having a larger stop-loss than profit target? Yes, it does. But as you’ll discover later, it is precisely these backward sounding methods that produce the greatest profit in the market. After all, if 90% of traders are net losers, doesn’t it stand to reason that doing the opposite of what they do should produce a profit? More about backtesting and the amazing things it has uncovered for me later, for now, lets discuss getting those trades grouped together. As I said, below is my Trade Journal for the last 30 days.
Not a bad 30 days! And far different from how my Trade Journal used to look.
Now, to sort it by winners and losers, you should first highlight the column you want to sort by clicking the corresponding letter above it.
In this case we would want to highlight the Profit/Loss column “F”, like this:
Next, you want the computer to group the winners and the losers together. You do this by clicking the “Sort Descending” button which is located here:
Now, once you click the sort button you will have your winners and your losers grouped together in descending order from highest gain to biggest loss!
What I want you to do now is highlight the row beginning with the first percentage and continuing down to the first empty space below the last percentage like this:
Once you have this area highlighted, click the “Auto Sum” button here:
Now you can see your cumulative total of wins minus losses for your entire trading career up to this point.
Don’t worry if your number is negative. Mine was when I first did it. That’s the nature of the game, and the cost of learning. Try not to beat yourself up about it, and if you are, know that you can and will improve. If you need some inspiration, look at my numbers now…
Believe me, if I can do it, anyone can do it. Now, once you have your cumulative total I want you to print this spreadsheet as well, and add it to the Date Order spreadsheet you first created.
Once you have printed that spreadsheet and saved it under a different name, we are going to find out what your average win vs. average loss is.
To do this click on the row number where you would like to add an empty like and click “Insert”. Do this two times and you will end up with two clear spaces. Like this:
Now you can highlight the P/L row (like you did before for the cumulative total) all the way down the winning trades including one (1) of the blank spaces. Like this:
Notice how you are only highlighting the winning trades now? Once you have the column highlighted as described, click the Auto Sum button found here:
Once you click the auto sum button you will have a cumulative total for your winning trades only. Once you have this number you can divide it by the total number of winning trades and you will arrive at your average winning trade. You can then repeat this for your losing trades and get your average losing trade. For the Resumption Trade System last month the totals looked like this:
Number of Trades: 24
Cumulative Total: 79.8%
Avg. Win: 04.5%
Avg. Loss: 03.02%
Once you have this information, I want you to print out this third and final spreadsheet, and place it in your binder. You now should have a binder with three different views of the same trade journal:
1. The Chronological Trade Journal
2. The Cumulative Total Trade Journal
3. The Average Win/Average Loss Trade Journal.
That is a lot of very powerful information. And it’s about to get a lot more powerful as we move on to Step 3.