Advice to Traders: Know Thyself
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Chris McKhann OptionMonster .com |
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The benefits of keeping a trading journal are many, yet most retail investors I have spoken with don't use one.
When I conduct seminars, I often ask traders how many of them have rules for getting into a trade; about half raise their hands. I can only assume that the rest go by rumors, the latest craze, or simply hunches.
I then ask them how many of them have set rules for getting out. About half of the original hands rise again. I ask further if they have exit rules for getting out if the stock goes down AND if it goes up. Only a few hands remain raised. (Taking profits is a key ingredient to trading success, but something that many overlook.)
Finally I ask how many have those rules written down. In a room of 200 to 300 people, there are usually 2 who do.
Trading, if it is to be taken seriously, must be treated as a business. That means a business plan is a necessity.
A business plan that isn't written down isn't a business plan. And part of that business plan must be your trading edge. If you don't have an edge, then you are just gambling.
An edge can come in many forms, including your risk management. There are traders who win only 40 percent of the time and are still profitable, and there are those that are right 90 percent of the time and blow up. So your trading journal should contain your edge, your entry rules, and your exit rules--both for winners and losers.
Obviously, your journal should also contain your trades. You should detail why you got into the trade, its timing, specific transaction prices, and exit prices (or stops). I also like to keep track of the general market conditions, as some trades work better at certain times, especially when it comes to options.
But keeping track of the closing and the profit and loss for a trade are really the most important parts, as they allow you to do later analysis. When I am writing down my trades, I find that I am much more disciplined: I am forced to put on paper whether the trade really fits my strategies and/or edge.
I believe that it is human nature to remember the good and play down the bad (the only reason I can imagine that a woman would have more than one child). So keeping track of your trades can force you into an honest assessment of your strengths and weaknesses. It was just this type of analysis that led me to my current trading and success.
Focusing on what works for you and avoiding what doesn't can greatly increase your trading success. This sounds obvious, but I have talked to, and heard of, a number of option traders who insist on trading on expiration (or going into earnings) even though they consistently lose with such a strategy.
The truism "know thyself" is inscribed at the Temple of Apollo at Delphi in ancient Greece and, to be a successful trader, it is imperative to do just that.
Chris McKhann is an analyst and writer for optionMONSTER® based in Chicago. Previously he worked with a large online broker where he was a Senior Instructor and Derivatives Product Manager. He has taught options trading in a variety of venues writing options commentary for Investopedia.com. He started his professional investment career as a broker, but he grew up in the industry as his father was a gold dealer and his uncle was the vice chairman of the Bank of Boston.