Good Record-Keeping

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Good Record-Keeping

” There is no free lunch. As with so many other things, either you’re going to pay up front or you’re going to pay on the back end for being disorganized, and unfortunately, when you pay on the way out it’s always more expensive…” writes Andrew J. Mellon in Unstuff Your Life.

The market is perversely inconsistent in dishing out rewards and punishments. There is always a chance that a poorly planned trade may bring profits, while a wellplanned and carefully executed trade may end in a loss. This random reinforcement subverts our discipline and encourages sloppy trading.

Good record-keeping is the best tool for developing and maintaining discipline. It ties together psychology, market analysis, and risk management. Whenever I teach a class, I say: “Show me a trader with good records, and I’ll show you a good trader.”

Writing down your trade plans will ensure that you don’t miss any essential market factors. Good record-keeping will save you from stumbling into impulsive trades. Trading discipline is similar to weight control, which is very hard for most people. If you don’t know what you weigh today and whether the curve of your weight is rising or falling, how can you control it? Losing weight begins with standing naked on a scale in the morning and writing down your weight for that day.

We all make mistakes, but if you keep reviewing your records and reflecting on past mistakes, you’ll be unlikely to repeat them. Good record-keeping will turn you into your own teacher and do wonders for your account equity.

A quick read of a chapter will not make you a disciplined trader. You’ll have to invest hours in doing homework and accept the pain of having your stops hit. The work comes first, the rewards later. As your account grows, you’ll experience a wonderful feeling of accomplishment.

Let’s review the three key components of record-keeping:

1. Discipline begins with doing your homework (I’ll offer you a homework spreadsheet).
1. Discipline is reinforced by writing down your trade plans (I’ll offer you PDF files for working up long and short candidates).
1. Discipline culminates in executing those plans and completing trade records (I’ll offer you a link to an online Trade Journal).

Please feel free to personalize all of these documents. The markets are huge and diverse, and there is no “one size fits all” system of analysis, trading, and recordkeeping. The basic principles are in this book, but the way you implement them can be your own.

■ 57. Your Daily Homework

When you wake up in the morning and know that you need to be at the office in an hour, you don’t spend time planning every little step. You follow an established routine: get out of bed, wash, get dressed, have breakfast, get in a car, etc. This routine puts you in the groove for the day ahead, leaving your mind free for strategic thinking. By the time you arrive at the office, you’re ready to face the day.

It pays to have a morning routine for the market: a sequence of steps for touching base with the key factors that may dominate today’s trading. This routine should put you in gear with the market before the opening bell, making you alert and ready to act.

I use a spreadsheet for my pre-open routine. The person who gave me this idea was Max Larsen, a money manager in Ohio. I’ve changed Max’s spreadsheet: my current version is numbered 3.7, reflecting two major revisions and a handful of lesser ones. It is based on how I view the markets, while its imbedded links help me reach various websites for the information I want.

My homework spreadsheet (Figure 57.1) is a work in progress, as I keep adding and deleting lines. If you start using it, I’m sure that you’ll modify it to suit your preferences. My firm, Elder.com, offers my latest spreadsheet, complete with its psychological self-test as a public service—simply write to info@elder.com and ask for it.

After filling out this spreadsheet, I turn to my open trades. I review their stops and profit targets, making any adjustments for the coming day if necessary. Then, if I’m planning to trade today, I review my short list of candidates, focusing on planned entries, targets, and stops. Now I am in gear with the market, ready to place orders. I do this homework even if I know that I will not be able to trade during the day, for example when traveling. This discipline is just like washing and dressing in the morning, even on the days when you don’t plan to go to the office.

1	Elder homework	wed
$\overline{2}$	v37	2/19/14
3	Check Far East Markets	$up.2 - 1.1%$
4	Check Europe Markets	down.5%
5.	Econ calendar Briefing.com	Starts, permits down
6	Marketwatch	Crash of 2014
$\overline{I}$	Euro	1.375 $g/g$
8	Yen	98.1 g/g
9	Oil	102 g/g
10	Gold	1317 g/b
11	Bonds @us	$133,23 \text{ g/b}$
12	Baltic Dry Index	1.146
13	NH-NL	1208 / 365
14	VIX	13.9 r/b
15	S&P500 cash	1841 g/g
16	D value	at upchannel
17	D-13 FI	pos
18	Expectation of S&P candle	down
19	Mode: Active, Conservative, Defensive or day-trade	def

FIGURE 57.1 Daily homework spreadsheet. (Source: elder.com)

I begin by looking at the overseas markets, then major news, key currencies and commodities, and the key stock market indicators. With practice, the entire process can be handled in about 15 minutes. Let’s explore it, line by line.

1. Check Far East Markets—This link takes me to the relevant page on Finance.Yahoo .com. I write down overnight percentage changes for Australia and China. Each person’s memory works differently, and mine serves me best when I write things down.
1. Check Europe markets—Here I write down percentage changes for the German DAX and the UK FTSE. Markets follow the sun, and you get a feel for how a wave generated in the United States travels to Asia and then to Europe, before returning to our shores.
1. Economic Calendar—This link takes me to the page at Briefing.com that lists fundamental reports scheduled to be released each day. It shows the previous number for each release and the consensus forecast. When an important report, such as Unemployment or Capacity Utilization, either beats or misses its estimates, you can expect market fireworks.
1. Marketwatch—This is a website for the masses, and I look at it to see what they are being fed this morning. Occasionally it suggests contrary opinion trades.
1. Euro—I write down the current price of the most active futures contract, followed by the initials for the Impulse system—green, blue, or red—first for the weekly, then for the daily. This is the format I use for all other markets mentioned below. I look at the Euro futures charts for two reasons. First, there are stretches of time when this currency dances either in gear with or against the U.S. stock market. The other reason is that sometimes Euro futures offer nice day-trading opportunities.
1. Yen—The second of the two reasons outlined above applies here more than the first.
1. Oil—This is the lifeblood of the economy, and oil futures rise and fall with its ups and downs. Oil futures can be traded.
1. Gold—A sensitive indicator of fear and inflationary expectations as well as a popular trading vehicle.
1. Bonds—Rising or falling interest rates are among major drivers of stock market trends.
1. Baltic Dry Index—A sensitive leading indicator of world economy. BDI represents the cost of shipping dry goods, for example textiles from Vietnam to Europe or lumber from Alaska to Japan. BDI is very volatile, and the absence of any trading vehicles based on it helps BDI reflect true economic activity. It is extra useful if you trade shipping industry stocks.
1. NH-NL—I consider the New High–New Low Index the best leading indicator of the stock market and like to write down the latest weekly and daily figures every morning as a refresher.
1. VIX—The volatility index, also called “the fear index.” There is a saying: “When VIX is high, it’s safe to buy; when VIX is low, go slow.” A footnote: beware VIX ETFs, notorious for trading out of sync with the VIX index.
1. S&P 500—I write down yesterday’s closing price for the index and add the Impulse system initials for its weekly and daily charts.
1. Daily value—I switch to the daily chart of the S&P and note whether its latest bar closed above, at, or below value and also its relation to the channel lines. It helps me see whether the market is overbought or oversold.
1. Force Index—I note whether its 13-day EMA is above or below its centerline (bullish or bearish), as well as any divergences.
1. Expectation of the S&P candle—I test the accuracy of my market expectations by writing down whether I expect the market to close above or below today’s opening price. If no opinion, I leave this field blank. The next day I color this box green or red, depending on whether my expectations turned out to be correct.
1. On the last line of my homework spreadsheet, I summarize it by stating how I’ll trade today: actively, conservatively, defensively (closing trades only), day-trade, or no trades at all.

Are You Ready to Trade Today?

There are times when you feel in gear with the market, but at other times you’re out of touch. Your mood, health, and time pressures influence your ability to trade. For example, imagine trading while suffering from a toothache. You can’t fully concentrate on the market and should be calling your dentist, not your broker.

This is why each morning, I take a 30-second psychological self-test for an objective rating of my readiness to trade. The first person I saw use a self-test was Bob Bleczinski, a former Spiker. He may have posted his test online because in 2011, I saw SpikeTrade member Erin Bruce present her self-test at that year’s reunion. The questions she asked herself were completely different, but the format looked like Bob’s.

I modified Erin’s self-test to fit my personality and take it every day before the market opens. Any self-test must be short and specific. Mine has only five questions, and each of them can have only one of three answers: yes, no, or so-so. We’ll discuss the logic of designing such tests in the following chapter. If you start using this test, you’ll probably modify it to fit your personality and ask the questions that are most important to you (Figure 57.2).

A zero rating on some of the questions also warns me not to trade. If I haven’t done my trade planning or if my schedule is very booked up, this would be a bad day to trade—better stand aside or place only exit orders.

You, your mind, your mood, and your personality are the essential components of trading. This is why a quick self-test helps you see whether you should be trading today.

Physical - unwell 0	OK health, energy, sleep 1	Brimming 2
Losses for day 0	Prior day mixed or no trade 1	win for the day 2
Not prepared 0	Middling prepared 1	Very prepared 2
Bad mood 0	Mood middling: 1	Great mood 2
Very busy 0	Plate normally busy 1	Plate sparse 2
1-2-3-4 NO trade	5-6 AND 9-10 Caution	7-8 Good

FIGURE 57.2 “Am I ready to trade?” self-test. (Source: elder.com)

I take this test immediately following completion of my homework. Let’s review it line by line:

1. How do I feel physically?
- A. Feeling ill = 0
- B. Feeling average = 1
- C. Feeling excellent = 2
1. How did I trade yesterday?
- A. Lost money = 0
- B. Both made and lost money or didn’t trade = 1
- C. Made money = 2
1. Have I done my trade planning this morning?
- A. Not prepared = 0
- B. Middling = 1
- C. Well prepared = 2
1. How is my mood?
- A. Poor = 0
- B. Average = 1
- C. Great = 2
1. How busy is my schedule today?
- A. Very busy = 0
- B. Normally busy = 1
- C. Pretty open = 2

The spreadsheet adds up scores for all five questions and uses Excel’s conditional formatting to color the summary cell. If my score is four or lower, this cell turns red. With so many negatives, it signals me not to trade today. The score of five or six flashes a yellow light—trade very cautiously. The score of seven or eight gives me a green light, but if the score rises to nine or ten, the light turns yellow again—with everything so perfect, any change is bound to be for the worse. Don’t let recent success go to your head.

■ 58. Creating and Scoring Trade Plans

A plan for any trade must specify what strategy you’ll use. It must prompt you to check the dates of earnings and dividends or contract rollovers, in order to save you from being blindsided by predictable news. It must spell out your planned entry, target, and stop as well as your trade size.

Writing down a trade plan makes it real. Once you enter a trade and your equity starts fluctuating, you may feel stressed and forget to perform certain tasks. The plan you write prior to entering a trade becomes your island of sanity and stability in the middle of a storm; it helps ensure that you don’t overlook anything essential.

A really good plan will include a scale for measuring its quality. This objective rating, which we’ll discuss below, takes less than a minute, but it encourages you to implement only those plans that have a higher likelihood of success. It prompts you to drop marginal plans and not chase borderline trade ideas.

While all my records are in electronic format, I like having my trade plans on paper. I use preprinted forms that I named Tradebills, similar to waybills that come with the packages we order online. When a company sends you a product, it comes with a waybill that shows the name of the product, its quantity, your address, the mode of delivery, rules for returns, and other essential facts. My trades are accompanied by tradebills from the planning stage to the closing day.

I have two separate tradebills for each trading system, one for buying and another for shorting. Here we’ll review a tradebill for one of my favorite strategies. You can use it as a starting point for developing your own tradebill.

Whenever a potential trade catches my eye, I decide which system it fits and then pick up the appropriate blank tradebill. Right there, if a seemingly attractive trade fits no trading system, then there is no trade. Having decided on a system, I write down the date and the ticker symbol, and then score that potential trade, as shown below. If the score is high enough, I proceed to complete my trade plan; otherwise, I toss that sheet of paper into a wastebasket and go looking for other trades.

Wherever I go, I carry my tradebills for open trades. If I’m at my desk, they are next to my keyboard. If I go out during the day and bring my laptop, I put those tradebills between the keyboard and the screen, so they’ll be the first thing to see when I open up my laptop.

Having written down my trade plans for years, I gradually developed a method for scoring them before making a go/no-go decision. My habit of scoring plans was reinforced when I read Thinking, Fast and Slow by Prof. Daniel Kahneman. This book on decision making by a behavioral economist and a Nobel Prize winner underscored the value of simple scoring systems—they make our decisions more rational and less impulsive.

Scoring Your Trade Plans (a Trade Apgar)

Among the examples in Prof. Kahneman’s book was his description of the work of Dr. Virginia Apgar (1909–1974), a pediatric anesthesiologist at Columbia University. She is widely credited with saving countless lives. Doctors and nurses worldwide use the Apgar scale for deciding which newborns require immediate medical care.

Most babies are born normal; some have complications, while others are at risk of dying. Prior to Dr. Apgar, doctors and nurses used clinical judgment to tell those groups apart, and their mistakes contributed to infant mortality. Dr. Apgar’s scoring system made their decisions objective.

The Apgar score summarizes answers to five simple questions. Each newborn is rated on its pulse, breathing, muscle tone, response to a pinch, and skin color. A good response to any question earns two points, poor zero, or one for an in-between. The test is generally done at one and five minutes after birth. Total scores of seven and above are considered normal, 4 to 6 fairly low, and less than 4 critically low. Babies with a good score are safe to put into general care, while those with low Apgar scores require immediate medical attention. The entire decision-making process, focusing on whom to treat aggressively, is quick and objective. Dr. Apgar’s simple scoring system has improved infant survival rates around the world.

After reading Prof. Kahneman’s book, I renamed my scoring system the “trade Apgar.” It helps me decide which of my trade ideas are strong and healthy or sickly and weak. Of course, as a trader, my actions are completely opposite to those of a pediatrician. A doctor focuses on the sickest kids, to help them survive. As a trader, I focus on the healthiest ideas and trash the rest.

Before I show you my Trade Apgar, a word of caution: the scoring method you’re about to see is designed for one system—my “false breakout with a divergence” strategy. All other systems will require a different test. Use my Trade Apgar as a starting point for developing a test for your own system.

For example, I recently gave the file of my Trade Apgar to a professional option writer who consulted with me. He loved the idea of a written test, which reduced impulsivity, one of his key problems. Within a few weeks, he showed me his own Trade Apgar, which greatly differed from mine. He replaced one of my indicators with his favorite RSI and Stochastic and added questions directly relevant only to option writing. I was happy to see that he was trading more profitably.

A Trade Apgar demands clear answers to five questions that go the heart of a trading strategy. As you develop a Trade Apgar for your own strategy, I suggest keeping the number of questions down to five and rating your answers on a zero/one/two point scale. Simplicity makes this test more objective, practical, and quick.

While looking at a potential trade, I take a blank tradebill from a stack and circle my answers to its five questions. A circle in the red column earns a zero, in the yellow column one point, and in the green column two points. I write down each number in the score box and add up the five lines. Also, if I circle the red column, I may write in the box next to it at what price the answer will change to a more favorable yellow or green. That will raise the plan’s score, allowing me to enter a trade at that level. Figure 58.1 shows a Trade Apgar for going long; Figure 58.2 shows a Trade Apgar for shorting.

It takes less than a minute to generate a Trade Apgar for any stock. I want to trade only healthy ideas whose score is 7 or higher, and not a single line rated zero. If the

	zero	one	two
Weekly Imp red		green	blue (after red)
Daily Imp	red	green	blue (after red)
Daily price		above value in value zone	below value
False bkout none		in place	near
Perfection			neither time one timeframe both timeframes

FIGURE 58.1 Trade Apgar for going long, using a strategy of “false breakout with a divergence.” (Source: elder.com)

Rate your answers to five questions on a scale from zero to two:

Weekly Impulse (described in this book)—zero for Red, one for Green, two for Blue on the weekly chart.

Red Impulse prohibits buying, Green is OK but could be too late, while Blue (after red) shows that bears are losing power, which is a good time to buy.

1. Daily Impulse—same questions and ratings on the daily chart.
1. Daily price—zero if the latest price is above value, one if it’s in the value zone, two if below value on the daily chart.

Prices above value may be too late to buy, in the value zone OK, below value could be a bargain.

1. False breakout—zero if none, one if it already happened, two if on the verge of happening.
1. Perfection—zero if neither timeframe, one if only one, two points if both look perfect.

I always analyze markets in two timeframes; one of them must show a perfect pattern for any strategy in order for me to enter a trade. Very rarely both timeframes are perfect—it is fine for one to be perfect and for the other to be merely good. If neither timeframe looks perfect, it can’t be an A trade—drop this stock and move on to another one.

score is 7 or higher, I go on to complete my trade plan. I establish my entry, target, and stop, decide what size to trade, etc.

Trade Apgars provide objective ratings for potential trades. With thousands of trading vehicles available to us, there is no need to waste energy on poor candidates. Use a Trade Apgar to help you zoom in on the best prospects.

Using a Tradebill

Once you become interested in a stock and a Trade Apgar confirms your idea for a trade, completing a tradebill will help you focus on the key aspects of that trade.

Let’s review a tradebill for long positions (Figure 58.3).

I designed my Tradebills in PowerPoint, fitting two to a page. I always keep some blanks handy, but don’t preprint too many because I keep tweaking these forms.

My tradebill for short trades is the same, except for a different Trade Apgar, as shown in Figure 58.2. When you start developing your own tradebills, you may want

	zero	one	two
Weekly Imp green		red	blue (after green)
Daily Imp	green	red	blue (after green)
Daily price		below value in value zone	above value
False bkout	none	in place	pos w/bear divg
Perfection			neither time lone timeframe both timeframes

FIGURE 58.2 Trade Apgar for shorting, using strategy of “divergence with a false breakout.” This is a mirror image of Trade Apgar for buying, using the same strategy.

Part 1: Trade identification.

The green stripe marks it as a long trade.
A thumbnail picture of a bullish divergence with a false breakout is a reminder of the strategy.
The first box is for the ticker symbol.
The next box is for the next earnings date. You can look it up at several free websites, such as www.Briefing.com, www.earnings.com, or www.Finviz.com. Most traders avoid holding stocks whose earnings are about to be reported. A nasty earnings surprise can do serious damage to your position. Writing down that date forces you to focus on avoiding trouble.
The next box is the dividend date, if any. I usually look it up at http://finance.yahoo.com. Dividends create tax consequences for longs, while shorts have to pay dividends, so they definitely want to avoid holding on that day.
The last box is for the date of my plan.

Part 2: Trade Apgar

My Trade Apgar was described above. Remember that each strategy demands its own Apgar. You’re perfectly welcome to replace my questions with those that are relevant to your own system. For example, you may ask whether Stochastic is in the overbought zone (zero), oversold (one), or oversold with a bullish divergence (two).
After you sum up the numbers for the Trade Apgar, answer this key question in writing: Is this an A-trade? If the total score is below 7, drop this stock and look for another trade.

Part 3: Market, entry, target, stop, and risk control

The five boxes along the left edge require me to answer questions about the general state of the market. Is the Spike Bounce signal in effect? Is the indicator that traces stocks above their MAs bullish or bearish? What is the short interest in this stock and how many days to cover? All of these studies have been described in this book. The last box is for a few words of a summary.
Three boxes linked by arrows are at the heart of my decision-making process. They demand three essential numbers for every trade: the entry, the target, and the stop.
Dollar risk—How many dollars are you willing to risk on this trade? This number can never exceed two percent of your account equity. I usually keep it considerably below that threshold.
Size—How many shares or futures contracts will you buy, based on the permitted dollar risk and the distance from the entry to the stop. This is explained in detail in “The Iron Triangle of risk control” in Chapter 50.

Part 4: After the entry

The A target is 30% of the daily channel height added to the entry price.
The soft stop is what you may keep in mind, while the hard or catastrophic stop is the actual order. It may not be any lower than the stop listed in Section 3.
Put in the price level at which you’ll move your stop to breakeven.
Check the boxes on the right as you perform these essential steps: place a stop, create a diary entry, and place a profit-taking order.

Part 5: The copyright line

■ This line shows when this tradebill was updated. As a reader of this book, you’re welcome to write to info@elder.com and request the latest version, which we send to traders as a public service.

to copy sections 1, 3, and 4, but develop your own section 2—the Trade Apgar for your own system or strategy.

■ 59. Trade Journal

Memory is the cornerstone of civilized life. It allows us to learn from our successes and even more from our failures. Keeping a diary of your trades will help you grow and become a better trader.

Keeping detailed trade records feels burdensome—but that’s what serious traders do. Many people asked me after I published a book of interviews with traders (Entries & Exits, 2006), what all of them had in common. They lived in different countries, traded different markets, and used different methods—but all kept excellent records.

The best example came from the woman whose interview was in the first chapter of that book. While finishing the manuscript, I realized that our interview had been incomplete and I needed to ask additional questions about her trades. A year later, on another visit to California where she lived, I asked to meet again. I assumed she’d show me some recent trades, but she went to a filing cabinet and pulled out a folder with all her trades for the week of my previous visit. We completed our interview by reviewing her charts from a year ago as if those trades were made yesterday. A bull market was in full swing, she was doing great, but still worked to improve her performance. Her detailed diary was her selfimprovement tool.

Let your diary entries serve as your “extra-cranial memory,” a tool for building the structure of success.

For years, I struggled with developing a record-keeping system that would be easy to update and analyze. In the beginning, I kept the diary of my trades in a paper journal, gluing in chart printouts and marking them up—I still keep one of those antiques next to my trading desk. Later I kept my diary in Word, and then in Outlook. Finally, in 2012, Kerry Lovvorn and I created a web-based Trade Journal1 .

This Trade Journal is a joy to keep, and both Kerry and I use it for all our trade diaries. Our Trade Journal is available to all, and its use is free (up to a limit). The journals are online, password protected, and absolutely private—although SpikeTrade members have an option of sharing their trade journals for selected trades.

¹ We relied on capable programming by Helena Trent and used several ideas suggested by Jeff Parker.

	A



	B





	D


C




E

FIGURE 59.1 Trade Journal (a partial view). (Source: Spiketrade.com)

Section A—The Trade Journal asks why I decided to trade this stock. I usually leave this box blank because I like to write such comments on the charts, using SnagIt software. In the case of ADSK, I attached a combination chart, featuring weekly, daily, and 25-minute charts.
Section B—Documenting entry and exit dates and prices; accounting for slippage and seeing buy, sell, and trade grades.
Section C—Reasons for exit with an attached combination chart showing both entry and exit.
Section D—The list of exit tactics is longer than that of trade strategies. I may exit because my trade hit its target, or its stop, or is reaching the value zone or the envelope. I may exit if a trade is going nowhere or starting to turn. There are also two negative exits: couldn’t stand the pain or recognizing a junk trade after I entered.
Section E—Post-trade analysis. I like to return to every trade two months after the exit and review it with the benefit of hindsight. I create a follow-up chart, mark my entry and exit with arrows, and then write a comment on how my trade looks after the passage of time. This is the best way of learning what I did right or wrong.

Our Trade Journal is shown in Figure 59.1. Even if you prefer to build your own, look at it to see what must be included in your own record-keeping system.

The Trade Journal is designed to make your record-keeping simple and logical, helping you plan, document, and learn from your trades. We have already reviewed several sections of the Trade Journal. Figure 38.1 showed its three sections—Setup, Risk, and Parameters. Figure 55.2 showed the strategy box in the Trade Journal.

Most of us quickly forget past trades, but the Trade Journal prompts you to return to them. The trades you entered and exited at the hard right edge of the chart are now in the middle of that chart, where you can re-examine your decisions and learn how to improve them.

Three Benefits

Keeping a trade journal delivers three major benefits. One is immediate—a greater sense of order. The second comes a month or two later, when you start reviewing your closed trades. Finally, after you accumulate dozens of records, you’ll have several ways to analyze them and learn from your equity curves.

A Sense of Order and Structure comes from documenting the plan, the entry, and the exit for each trade. Where exactly will you enter, what is your target, where will you place your stop? Defining and writing down those numbers will steer you towards disciplined trading. You’ll become less likely to slip into an impulsive buy, overstay a profitable trade, or let a loss snowball without a stop. Filling out risk management numbers will give you a handle on trade sizing. Documenting exits will make you face your trade grades.

FIGURE 59.2 DISCA daily with 13- and 26-day EMAs and a 6% channel. Impulse system with MACD-Histogram 12-26-9. (Chart by Stockcharts.com)

Follow-Up Analysis (Shorting a Top)

My strategy for shorting Discovery Communications, Inc. (DISCA) was “fading an extreme;” my exit tactic “started turning.” Entry and exit are marked by arrows. A review two months later confirmed that both decisions were correct. Lesson: the next time I see this pattern, jump aboard.

Reviewing Every Trade a month or two after your exit is one of the best learning experiences you can have. Trading signals that may have appeared vague and uncertain at the right edge of a chart become crystal clear when you view them in the middle of your screen. Returning to your past trades and adding an “after the trade” chart makes you reevaluate your decisions. Now you can clearly see what you did right or wrong. Your journal will be teaching you priceless lessons.

I make my strategic decisions on the weekly charts, tactical on the dailies. Since my daily charts are formatted to show five to six months of data, once a month I spend a few hours reviewing trades that I closed two months ago. For example, at the end of March or in the beginning of April, I’ll review all trades that I closed out in January. I’ll pull up their current charts, mark my entries and exits with arrows, and write a comment on every trade. Let me share two examples with you (Figures 59.2 and 59.3).

Such reviews teach you what’s right with your trading, and what needs to be changed. Soon after I started doing my “two months later” reviews, I became aware of two problems with my exits. I noticed that my stops were a bit tight and that helped me figure out that by slightly increasing the amount of risk, I could substantially reduce the number of whipsaws and come out ahead. I also noticed that while my short-

FIGURE 59.3 MCP daily with 13- and 26-day EMAs and a 16% channel. Impulse system with MACD-Histogram 12-26-9. (Chart by Stockcharts.com)

Follow-Up Analysis (Buying a Pullback)

My strategy for buying Molycorp, Inc. (MCP) was “pullback to value”—I thought that a new uptrend had begun. The following day, I was no longer so sure and sold for a small profit. A review two months later showed that I missed the resumption of the bear trend; my decision to cut and run with a small profit was correct, but I overlooked a major trade. Lesson: continue to monitor closed-out trades for a week or so and be prepared to re-enter or to reverse.

term swing trades tended to be good, I often missed bigger trends that emerged from those short-term moves. I used that knowledge to adjust my methods going forward.

Reviewing Your Equity Curve is essential because only a rising curve certifies you as a successful trader. If your equity curve is in a downtrend, your system may be at fault, or your risk management poor, or your discipline lacking—whatever it is, you must track it down and solve that problem.

Still, a combined equity curve for all your trades and accounts is a pretty crude tool. The Trade Journal allows you to zoom in and trace your equity curves for specific markets, strategies, and exit tactics. For example, I can run separate equity curves for longs and shorts, for different strategies and exits, and even for sources of my trade ideas. Believe me: once you see an equity curve for exits marked “Couldn’t stand the pain,” you’ll never trade without stops!