“Thank you! Successful trading has more to do with psychology than
methodology and this post in one of your most valuable.” Jack B.
If you appreciate these free Emini trading videos then hit the Google +1 button.
Trading Log: Identifying, tracking and fixing your most frequently repeated trading mistakes is THE fastest way to get profitable. Period.
My 7 Deadly Trading Sins
Remember the 1995 movie Se7en with Brad Pitt, Morgan Freeman and Gwyneth Paltrow? A serial killer is on the loose, picking his victims because they represent the worst of human behavior – the Seven Deadly Sins. There are murders to punish Greed, Gluttony, Sloth, Lust, Pride and finally Envy and Wrath in the final scene.
Well, when it comes to trading, I've got my own list of worst trading behavior – my own 7 Deadly Sins of Trading if you like:
- Trying to pick tops or bottoms ("Billy, Don’t Be a Hero" playing in my head)
- My gut says we’re going to break out (Professionals love fading breakouts)
- No confirmation from my Volume indicators (wait for everything to line up)
- Hesitating on entry (typically when the trade is "hard" to take)
- Canceling my stop (OMG, the biggest Sin of them all!)
- Moving my profit target (got to let the winners run)
- Letting a profitable trade turn into a loser (luckily, a rarity)
Use a Trading Log to make fewer mistakes …
My 7 Deadly Sins Stats for 2009
The chart above shows the breakdown of trading mistakes I made last year split between each Deadly Sin. As you can see, my most common mistake is moving my profit target – I get scared out of trades too quickly. Resolution for 2010: hold out for my profit target and if I've got a "runner" (break out into trend move) then increase the profit target and exit on an "End of Trend" warning signal.
Since I started trading I’ve always kept a trading log. In the early years the trade log just recorded the result of each trade – mostly swing trades and so not too difficult. I then started to keep more detailed notes about lessons learned from each trade, how I felt about the trade, what to remember for next time. Frankly, this became too onerous and I hardly ever reviewed the trade log.
These days I keep it simple. I record the daily total of my day trades (total points, number of trades and number of contracts) and also keep track of my swing trades. Then each day I evaluate every trade against my 7 Deadly Sins. Obviously the goal is to make fewer and fewer mistakes over time.
I track it all in a spreadsheet trade log with 1 line for each day. The spreadsheet then automatically calculates a running total of my trading profit and 7 Deadly Sins performance. This way it's pretty straightforward to see how I'm doing against my annual dollar target and highlight my most common trading mistakes.
Here are instructions for using the simple Trading Log that you can download below.
Trading Log: Starting Assumptions
Start by filling out the Starting Assumptions tab. In the first section, input your starting date, Emini point value ($50 for S&P500 Emini, ES) and actual brokerage costs per "round trip" (entry and exit).
Then decide on your target performance – your trading goal for the year. Fill in your starting account balance (or the capital you're going to allocate to trading) and the level at which you'll add contracts. This has to be above your broker's margin for initiating a trade (day session or after hours session) but will depend on how aggressive you want to be.
Finish by deciding a daily target in terms of points made and the number of trades you realistically need to achieve this. A 1 point daily target when you're starting out sounds too easy – don't be fooled. The number of trades should set a mental level above which you would feel as if you're over-trading.
Trading Log: Daily Performance Inputs
Daily Performance Inputs
Then every day, go to the Trade Log tab and input your daily performance: points made, number of trades and number of contracts traded. The spreadsheet automatically calculates your daily profit and keeps a running total.
Please note, all inputs in the Trading Log spreadsheet are colored red and are bold. The Trade Log that you can download from this page has the daily inputs re-set.
Trading Log: 7 Deadly Sins Inputs
7 Deadly Sins Inputs
After inputting your trade performance stats, assess every trade you made that day against the 7 Deadly Sins (or your own list of common mistakes). Add the number of mistakes under each Deadly Sins column. Again, the spreadsheet automatically calculates your running split between different Sins (highlighted in yellow).
For me, I’ve gotten to the point where even as I'm entering a trade I can feel if it's violating one of my rules. This makes it easier to exit early and take a small loss, or maybe even make a small profit. Over time my worst habit has changed too – I used to enter too early, now I exit too early!
Trading Log: Performance against Target Chart
Trading Log Performance Chart
Lastly, the trade log spreadsheet includes a simple chart of your running performance against your annual target. The red line represents your performance. The dotted black line shows your calculated target.
Psychologically, it’s better to have a modest target and achieve it every day than an aggressive target and fall behind. You’ll start taking larger risks to try and catch up instead of focusing on consistent performance day-after-day.
If you’re after a more sophisticated software solution to do your trade tracking and tax accounting then check out this directory at Interactive Brokers. Good luck with your Emini trading and I hope this simple Trading Log is helpful to you.