"Show me a trader with good records and I'll show you a good trader."
~ Dr. Alexander Elder
"Dr Edwards Deming was an adviser, consultant, author, and teacher to some of the most influential businessmen, corporations, and scientific pioneers of business process reengineering. He has been described as a national folk hero in Japan, where he was directly responsible for inspiring and guiding the spectacular rise of Japanese industry after World War II, as well as the original management science guru, and founder of the third wave of the Industrial Revolution. His extensive list of published works includes nearly 200 papers, articles, and books."
Source : Columbia .edu
Figure 1: “Plan ==> Do ==> Check ==> Action”
Picture Source: Wikepedia
The above may be already familiar to many, to the Japanese, it is primarily a quality control technique for continuous improvement in the manufacturing process, and could be applied in any field from sales to accounting to marketing. And, applicable to the investing and trading processes as well.
Dr Edward Deming, who is considered by many to be the father of modern quality control, here's some further information on him:
“PDCA was made popular by Dr W. Edwards Deming, who is best known for his work in Japan after WWII, particularly his work with the leaders of Japanese industry. That work began in August 1950. Many in Japan credit Deming as the inspiration for what has become known as the Japanese post-war economic miracle of 1950 to 1960, when Japan rose from the ashes of war to start Japan on the road to becoming the second largest economy in the world through processes founded on the ideas Deming taught.”
~ Source Wikipedia
For good effective trading, apart from having good trading psychology, one has to have a trade plan. A trading plan, in general, would encompass the following objectives: a. Avoid emotion based trading, b. Continuously increase winning trades as a % of total trades c. Increase size of winners. d. Monetary goals.
As each of us is different from one another, the objectives of the trading plan will be unique to each individual personality and ambitions.
There are, a number of elements on trading plan that one has to consider, for example:
* Familiarity of the Instrument. Liquidity, Volatility.
* Rules for Entry: Price Action / Indicators
* Signals to Trade / News Events.
* How many positions to keep each time.
* Position Sizing. Risk-Reward Ratio.
* Risk Managment.
* Important: Trade Journal (continuous improvement).
As you already noticed, I placed the item Trade Journal as the last item and 'marked' it as important. There's a good reason behind it, but, before we proceed to discuss the importance of having a trade journal, let us look at a flowchart of a trading / investment process.
Fig 2: The Trading / Investment Processs
Source: investopedia .com
To some, the above diagram may look a little daunting, and I cannot agree more (hint: I do not use it).
However, if you are conscientious to some degree in your trading and / or your investment process, you are possibly processing your own flowchart in your brain (the actual entries might be different, but the elimination / decision process is probably similar to some degree).
Also, one of the main reason that I put up this diagram is that, whether conciously or sub-conciously, that is how a constantly 'improving' professional trader would think and go through an iteration in his mind to continuously sharpen his trading edge.
The simple question then is: “How can one improve his trading process?”.
One possible solution to the above question is, going back to what we discussed earlier:
Having a Trade / Investment Journal
Personally, I am a believer of having a trade journal and that, it is one of the best ways to achieve the followings:
* Clarify one's thought process. Once something is written down, it usually becomes much clearer.
* It serves as a record that one can refer to as time passes.
* It helps to anchor one to good experience / trades / investment decisions. so as to allow one to repeat the process.
* It allow one to review past failures and learned from one's mistake.
* It could be some reminders or some great investment or trading quotes / saying by your favorite investors like Warren Buffett or Paul Tudor Jones, for example.
With mordern technology, the process has now become even better. I write my trade journal on my iPhone using a diary app call Momento, which, apart from allowing me to post written entries, I could also post screen shots and charts. You can easily identify powerful diary / journal-like apps on your mobile devices (any system, Android, iOS, Windows) to perform the same task.
Some sample entries could be something like these screenshots below:
Example A: A Quotable Quote
A simple quotable quote that I happen to stumble upon and like and think it is useful to my trading / investment process.
Example B: An Obeservation of DJIA
Above is a simple observation of DJIA, with the opinion that it is still trending / holding up, and perhaps adopting a ready stance for opportunity to do a short should the right setup / opportunity / events, happen.
Example C: Trade Initiation
In this case, a position initiation, with information on entry price, breakeven cost, and stoploss (SL) level, and some simple notes on the instrument itself. In general, if you are starting new, you may want to state as much information as possible, and it could get simpler and simpler as time passes by, as you gained experience. (Note: There's not need to bother with the details here on the chart nor the description of Proshares Short Russell 2000, as the main objective is to illustrate a trade journal entry).
With the explanation on the importance of having a trade journal and the above examples, I believe now you could see the possibilities of how a trade journal could indeed help you in your trading / investment process (and for that matter, many different areas in your life perhaps).
Many would agree that trading (and Investing) is more of an art not a science, in summary, a trade journal is akin to having the PDCA (Plan-Do-Check-Action by Dr Edward Deming) process in your trading / investment system and will help you to crystalize your thought process, record your observations and trading / investing activities, hence help you to perform your trade reviews efficiently and effectively. Lastly and most importantly, achieve the objective of continuously improving your trading and investment processes to improve your trading system and edge.
Enjoy the journey.