Keeping a trading diary
-An important part of your option trading education explained
-Dear diary, today I’m happy cause my option positions went well....No, that’s not what I mean by a trading diary. A trading diary is a way to structure your own option trading and option trading education. A trading diary is a log of your reasons for taking positions and your observations of the market and yourself. The two primary reasons for keeping a diary of your trading are to increase your discipline and facilitate learning. Writing things down forces you to clarify your reasoning and helps you remember revelations you’ve had and things you’ve learned. This way the trading diary not only gives you a structure for your option trading
education but is a great tool for educating yourself based on your own experiences. It’s important to regularly review your diary. Both regarding particular trading situations and regarding your general thinking around trading. Otherwise you’ll remember some and forget some. Let’s face it, experience can come at a high price. It’s especially important to write about trades that went wrong. These trades are great learning opportunities. I would go as far as claiming that these trades are the ones you can profit most by learning from. Most people have a strong tendency to distance themselves from losing trades. Some go as far as ignoring a really bad position. Bad trades often make us less interested in trading and make us feel that trading is not that important. Good trades make us more interested and make us feel trading is the greatest thing you can do. Keeping a diary helps you stay the course and helps you learn from bad trades. After all, great trades don’t leave much room for improvement but bad trades can be improved a lot. Maybe avoided altogether. These trades leave the most room for improving your overall performance.
I sort the top level entries in my trading diary according to situation rather than date. Let’s say I see interesting situations in both the General Motor stock and the USD/EURO exchange rate. I then open entries in my trading diary for each of these markets. Below each heading I sort my observations according to date. This makes it much easier to follow the development of each market. If my primary heading was date, I would have to browse through the whole diary to see how my view on the GM stock has developed.
When I start writing about a situation, my first entry in the diary is usually the most extensive one. After all, this entry would include all the observations and analysis you’ve made up till you decided it’s time to open an entry on this situation. Once I’ve written down my initial thinking, following entries are usually shorter and sorted according to date. I divide my initial entry into four parts: Situation, Reasons for entry, Reasons for exit and Conclusions.
Situation
This often contains a review of historical developments and factors driving the market. Fundamental and technical analysis would be outlined here. Let’s say you’re following the USD/EURO exchange rate. Under your description you would probably include the long term upward trend in this market (USD loosing value relative the EURO), the focus in media and the market on the USD budget and trade deficits and shorter term patterns you’ve observed in the exchange rate.
Reasons for entry
This describes your concrete trading idea. This could be that you expect the war in Iraq to be longer and more costly than most analysts believe. It could be that you expect a break-out from a range that the market has been trading in over the last few days. Here I would also include my preferred entry price. In my opinion, if you can’t enter the market at a good price, the whole trade might not make sense. Writing down the price at which this trade looks good helps you have the discipline and patience to wait until the price is advantageous.