Remember this rule: “it is OK to make mistakes, but not OK to repeat them.” It reminds me of a Russian saying: “Don’t step on the same rake twice.” Many traders keep losing money, repeating the same mistakes.
A habitual loser doesn’t remember what he did right and made money or what he did wrong and lost. Had he remembered, he would have done more of the right stuff and stopped repeating the wrong moves.
Let’s be realistic: it’s beyond human capacity to remember all the nitty-gritty details of trading tools, systems, entries, exits, news reports, and a myriad of other details. That’s why we need to write those things down. Successful traders keep good records, review them, and learn from them.
You need to keep both numerical and visual records: a spreadsheet and marked-up charts of your trades. StockCharts gives you a great way to mark up your charts and I’m going to give you a spreadsheet you can use for numerical records. Let’s review the spreadsheet first.
Shown below are two lines from my spreadsheet, reflecting a trade I made while working on this book. Notice that in addition to the usual numbers, such as entry and exit dates and prices, gross and net profit or loss, this spreadsheet includes columns for rating the quality of each trade as well as of every entry and exit. I call them buy, sell and trade grades. You have to grade your performance in order to improve it.
1: Source – where I got the idea for this trade. It could be myself, an article or a friend’s tip
2:Method – If Source is ‘self,’ then this is the method I used to find this trade.
3:Symbol – Symbol or ticker
4:Quant – How many shares
5:l/s – Long or short
6:Bought – Purchase price
7:Date – Date bought
8:Comm – Commission (since I first sold one half and then the other, I split this line in two).
9:Sold – Sell price
10:Date – Sold date
11:Comm – Sales commission
12:Fee – Exchange fees
13:P/L – Gross profit or loss
14:Net – Net profit or loss
15:Buy gr – Buy Grade (How far from the day’s high did I buy? See below for more)
16:Sell gr – Sell Grade (How far from the day’s low did I sell? See below for more)
17:Trade gr – Trade Grade (What percentage of the channel did I capture? See below for more)
18&19:Upchan & Downch – Upper and lower daily channel lines on the day I bought
20,21&22: High, low and close on the day I bought
23,24&25: High, low and close on the day I sold
The all-important Trade Grade reflects the percentage of the price channel that the trade earned or lost. Prices flow in channels like rivers in their valleys. Your trade grade is the percentage of the width of the valley that you captured in your trade. You will see how to construct channels in one of the following chapters.
The TRADE GRADE: (Sell – Buy) / (Upper channel line – Lower channel line).
This formula compares your profit (or loss) in a trade to the spread between channel lines on the day you entered that trade. Since the distance from the top to the bottom of a channel reflects a realistic maximum available for a swing trade, the Trade Grade reflects the percentage of the maximum you were able to catch. A grade above 30% makes an A-quality trade. Don’t swing for the fences, set reasonable goals; anything above 30% is excellent.
Buy and Sell grades reflect the quality of every purchase or sale. Each of these grades is based on a single bar, measuring how your entry or exit relates to the high and the low points of the day.
The BUY GRADE: (High – Buy) / (High – Low)
You want to buy as far away from the high and as near the low of the daily bar as possible. If you buy in the lower half of the daily bar, your rating for that buy is over 50%, which is excellent.
The SELL GRADE: (Sell – Low) / (High – Low).
You want to sell as far away from the low and as near the high of the daily bar as possible. If
you sell in the upper half of the daily bar, your rating for that sell is over 50%, which is excellent.
Your Buy and Sell Grades show where you stand in the never-ending battle against the pros who make a living buying near the lows and selling near the highs. If you buy in the upper half of the bar and sell in the lower half, you’re feeding the wolves. Of course no one can definitely tell what will be the high and the low of the day, but getting consistently low ratings is a sign that you’re chasing runaway prices and need to tighten your discipline.
The spreadsheet above shows two lines documenting one trade because I purchased that stock in a single trade but sold it in two installments. This is marked by the entry commissions on both lines being boxed together. My Buy Grade was 74%, meaning I bought near the bottom quarter of that day. Notice also that the closing price for that day (Col. 2) is colored green because my purchase price of $92.85 was below the closing price of $93.17. This meant that the trade was profitable at closing time – another measure of its quality.
I exited the first half of the trade because I thought the market was becoming toppy and wanted to take partial profits. My Sell Grade was 76%, based on the high and low of the sale day, but I sold too early in the day. The stock closed for the day above my sale price, which is why I colored the closing box in Col. 25 in red.
The next day the stock reversed and headed lower. I cut and ran, getting a poor sale grade of only 21%, meaning I sold in the bottom quarter of the day – chasing the trend. Still, the stock continued to decline after I sold and closed below my selling price, earning me a green box in Column 25.
Both Trade Grades were good – 41% of the daily channel for the first sale and 40% for the second. Both were above the 30% level that marks A-quality trades.
I hope you appreciate how much useful information about the quality of trades you can get from analyzing a single line in a spreadsheet. Imagine how much more you can learn from analyzing dozens of such lines.
In addition to numerical records and ratings of all your trades, it’s very educational to keep a visual diary of your trades. Save a picture of your stock and its indicators on the day you buy it and another picture on the day you sell. By reviewing them at a later date you’ll be able to see what works well and what doesn’t work in your approach to trading. Those snapshots will turn you into your own teacher.
StockCharts makes it easy to maintain a visual diary, combining price charts, indicators and comments. Near the end of this book, after we’ve reviewed the analytic and decision-making process, I will share with you my visual diary of this AMT trade and show you how to maintain it in StockCharts.
Keeping a visual diary of your trades along with numerical records will set you apart from the pack of competitors. You’ll rise above them by having what they don’t have: risk management and record-keeping. These tasks aren’t nearly as exciting as looking for trades and entering them – but they make all the difference between long-term winning and losing.