meParticipantMay 27, 2016 at 12:52 pmPost count: 27
I am a big proponent of the mantra that ‘you can’t improve what you don’t measure.’ Detailed metrics of your trades is a starting point, and often people look at their win-rates, skew of returns between profits and losses, etc. However, often this information is not terribly useful and can actually obfuscate the core drivers of our performance.
As discretionary fundamental traders, we place trades based on a decision process that includes limited and at times conflicting information, which is available to most participants in the market. What steps can we take to ‘improve’ in this area, and ensure that our decision making process is robust, enhancing our trading performance? A trading journal is the tool to accomplish this, in my view.
In reviewing past-trades post-mortem, it’s all too easy to discount the mistakes, thinking that this trade was a careless one and that you ‘would have known better’ if you had the same opportunity again. In this way, we succumb to hindsight bias – the false sense of certainty when evaluating events of the past in which the outcome is known, or thinking that a conclusion was predictable when there is little objective evidence that is was.
Why is it that it’s so difficult to assess the quality of our past decisions? The answer is, in short, that rationality is ‘state-dependent.’ Here’s a practical example. Do you remember that one time after having one too many drinks, you thought it would be a great idea to _____ (fill in the blank)? It seemed so rational at the time… The next day, while nursing the hang-over, you were probably also nursing your ego for your cringe-worthy performance while inebriated.
This principle also applies to trading decisions. Our rationality is determined by our mental/emotional state, and the facts and issues on which our mind focuses. Are we angry, frustrated, sad, or elated when assessing a trade? Do we have certain preoccupations, desires, or worries that we are externalizing on the markets? How are we interpreting the disparate and conflicting data points? Are there certain cues that are automatically triggering undesirable behaviors or mental states? Is there some pesky technical level you can’t seem to get out of your head?
These are all factors which influence our decisions, whether we like them to or not. And a good journal seeks to unpack these influences and make the patterns they create clear.
[to be continued…]
Curve AdvisorKeymasterMay 27, 2016 at 9:11 pmPost count: 612
I wanted to thank “me” (it’s not me btw) for agreeing to do some guest posts for the Forum. I think keeping a journal could be a very useful tool – especially for people who like to be more thoughtful about their trading. When I first started trading, one of the senior traders on the desk kept a daily journal where he wrote down his thoughts on anything he found useful in his trading. It can be a really helpful tool, and I was thinking about picking it up again myself. As you all know, one of my Trading Philosophies is to “always keep learning.” I’m looking forward to hearing more.
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