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Don’t Neglect The Basics

April 2004
by Mike Kidwell


Dear Diary,

Yes the importance of a trading diary should not be underestimated. Some, I am sure will after noting the first sentence of this article, move on to what they believe is a more interesting or more complicated aspect of trading. This would be a mistake though, unless they already have an efficient trading diary and are using it. Most traders spend the majority of their time scrutinizing trades before they enter them. And of course, this time is well spent, but this is only the beginning of the journey.

You might ask yourself, why do I spend so much time scrutinizing, examining and dissecting the history of a stock before I enter it? After answering those questions, you should notice, that the answers are just as important after the trade has been closed. Actually they are even more important! Why? It has to do with the scientific method. You probably recall learning about this from your school days in science class. It is basically a four step protocol to solving a problem. We though, are only concerned about the first three.

1. Observation and description of a phenomenon.

2. Formulation of an hypothesis to explain the phenomena.

3. Use of the hypothesis to predict quantitatively the results of new observations.

Before entering a long trade, we have a belief that the price will go up. This is based upon step one of the scientific method. We believe we have seen this pattern before and it is a precursor to rising prices. You may or may not care about step number two (why this happens). Step three however, is very important. We want to verify if our hypothesis was correct. Otherwise our hypothesis might be incorrect and we might be repeating the same mistake over and over. So to review the results of our observations we need a trading diary. This will confirm if we are headed in the right direction or if we need to change our course.

What should it contain? Well, here is the one I keep and have found very useful.

It is pretty self explanatory. It basically tracks the details of your trades. The last two columns, “Entry Strategy” & “Exit Strategy” are the essential parts of this form. This is where you document the reasons why you decided to open the trade and why you decided to close the trade.

Depending on how you make these decisions, you might make a small note or you may need to use a code of some sort to indicate lengthier explanations.

Next, at the end of every month or throughout the month, you review the results of your trading as it relates to the decisions you made going in and out.

If you are not used to doing this, you may be surprised what it will reveal to you, especially once you have more than a few trades to review. This method is key to improving your trading skills.


One last note though. Under no circumstances should you start questioning your reason for entering a trade while the trade is still open. Many new traders succumb to this temptation and start second guessing themselves and therefore break discipline, “changing horses in the middle of the stream” so to speak. Then you will not be trading with any kind of plan whatsoever. This will only lead to confusion and a loss of capital.

Best regards,

Mike Kidwell

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.




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