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Not-So-Secret Diaries

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Many a younger sibling has broken into an older sister's diary. Each morning, subscribers to the OptionInvestor's Market Monitor and Futures Monitor peek into this older sister's and those of the other contributors. Our trading diaries, that is.

An integral part of a trading diary consists of a post- or pre-market synopsis of what happened and what might happen next. I term these my scenarios for the day's action. Sometimes those scenarios unfold just as I expected, and sometimes they're dead wrong. Either way, the scenario allows me to test the action against my expectations and determine right away if those expectations are well founded or not. If my scenario is flawed, the scenario might need to be revised or I might need to be out of the market, or both.

My early morning scenarios tend to be too wordy to be pasted into this article, but the entry on September 20 noted the approach of Rita and the FOMC decision due later that afternoon. I chose that day for a discussion of a trading diary or log because it included two such momentous events. That day's first OEX-related entry noted the tendency of the OEX to churn either above or below the 72-ema, with that average having been tested the previous day.

For reference, here was the chart of the OEX as of the close September 19, with the 72-ema the aqua-colored line and the 200-sma, the blue one.

Annotated Daily Chart of the OEX:

My first OEX-related commentary that day, what would have constituted an integral part of my personal trading diary, concluded that the OEX might chop around pre-FOMC between that 72-ema and 200-sma's support and descending resistance at about 573.30. Then it might break through either support or resistance around the time of the FOMC decision. Further cautions to myself and readers included the tendency to see some volatility post-FOMC results, with the first direction not always the final direction.

The entire entry can be found on the Market Monitor archives, 9/20/2005 at 8:58:58 AM. Components of the entry, a typical sort of trading diary entry, included the following:

1. Economic reports or other developments due.
2. Weather-related factors impacting markets.
3. Support and resistance.
4. Chart formations.
5. Typical behavior of the OEX.
6. Conclusion or scenario.
7. Time and level to watch for trades.
8. Signs that the scenario was not unfolding as expected.

That day, weather-related factors were included because they impacted markets. On other days, that first entry might include geopolitical developments, "gut" feelings about what might happen, upcoming holidays on our or other markets that might change trading volume or any number of other events or factors that could impact the behavior of the markets. In personal trading diaries, including notations on the day of the week, family- or business-related stresses, and the profitability or losses of the previous day's trades can be important, too. While your previous day's trading record might not influence the behavior of the markets, that record can certainly change your trading behavior and can become important in determining why some trades work and some don't. Perhaps you find that you take more risks after a run of profitable or losing trades than you would otherwise, for example. It was through an examination of a trading diary that I determined long ago that Friday trades don't tend to be as profitable for me as trades initiated toward the beginning of the week.

On a recent October day, one blogger noted his difficulty in detaching his attention from a losing trade even though the day's trades had been profitable overall. He mentioned his ongoing dilemma of choosing between waiting for a target to be hit or trailing a stop. His trading diary was helping him identify a couple of issues he needed to resolve with his trading, one emotional and one technical. Perhaps future entries will help him identify which strategy proves most profitable.

A trading diary should also account for trades taken and provide some explanation of why they were entered or exited. Such accounts are made easier for those whose online brokers allow them to set up rather mechanized trade parameters. For the rest of us, notations can be made via spreadsheets downloaded from the online broker and then incorporated into a computer document that also includes the synopsis of information such as that I include in my first OEX update each morning. Notations can be hand-entered into an old-fashioned ledger or jotted on a printed-out copy of the day's trading activity.

For example, the trades I made on September 20 are documented below as they might be in my trading journal, although with identifying account information such as order numbers and profits excluded. I like to look at the time of each trade, too, when I'm studying whether time of day or length of time in a trade affects its profitability. I also added the OEX's value at the time of an entry or exit. My broker doesn't automatically download that information, but it is provided on trade confirmations. Note: Because my broker downloads these with the last trade first, begin at the bottom and move upward through the chart to see the progression of the trades for that day.

Table of Trades:

All trades on this day were profitable, although the last trade, the call position, netted only $4.10 per contract after commissions with my broker ($560-530=$30. $30-25.90 commissions=$4.10). This was because, in my haste in the post-FOMC environment, I chose an OTM option with a low delta, a poor choice for an expected scalp of a point or two. One conclusion from this day's trading diary is that future entries could perhaps include notations of the delta at the time of entry, although that's not actually a notation I usually need. After years of trading, I usually have a fairly good sense of how far ITM I want to be, but new traders might include this as a notation in their trading diaries. It can be an important component of identifying why some trades prove profitable and some not.

Because my day trades are often initiated or exited based on an examination of Keltner-based studies of the advdec line, some notations include information that the advdec line was at support or resistance, with support a time to look for long plays and resistance a time to look for bearish ones. Including those notations allows me to map how successful my strategy has been, although it's of course not as exact as some of the more mechanized setups offered by some other trading systems. If you're making entry and exit decisions based on RSI, Bollinger bands, Donchian channels, pivot points, Fib brackets or any other technical analysis tool, those notations should be included in your trading diary.

Some might include watch lists in their trading diaries. They might note point-and-figure targets for the stocks or indices in their portfolios, bullish percent figures for the indices that interest them, or any number of other figures or comments utilized in their trading methodology. Account balances at the beginning of the day might be noted.

Every day, subscribers to the Market and Futures Monitors peek into the trading diaries of the commentators, as our ideas and impressions are detailed real time. If I think a trade might be appropriate for the majority of readers, that's detailed real-time, too, although I don't drag readers into the riskier trades.

This article proposes ideas for you to use in your own trading log. Keeping such a log improves your performance. Although my trading diary is now mostly kept online for all to see, I once kept notebooks that detailed the same type of synopsis and live commentary that's now included on the Market Monitor pages. I once printed up charts and drew formation trendlines by hand to give me an actual tactile feel of the markets. Do something similar and perhaps someday you'll be writing for an online website, too, and I'll be peeking into your trading diary.
 

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