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Trading Journal: Path to Consistent Profitability + Trading Career
I've been a programmer for many years, and when I originally started trading, I started trading options on a long term position basis (selling OTM options on ETFs and equity indexes). This was obviously quite dangerous but did make money and technically I think I made money because I followed all of the rules: I had a plan, I backtested, and I executed the plan.
In the last few years I've shifted to working at home and having my own schedule; this allows me to move to a shorter time frame where I can trade more frequently (and hopefully increase the compounding of my capital).
When I moved to day trading, I abandoned all of those things I learned, wanting to be more intuitive and less logical (as I wanted to obtain a "flow" state). I had decided that scalping was the best way to go about that. After a year of that, I'm abandoning order flow as an exclusive entry/exit technique (although still using it to discretionarily decide whether to take trades or not).
Why I'm starting this:
I'm starting a trading journal here after roughly a year of unprofitable (day) trading. I was actually tipped off to this by Peter Davis of Jigsaw and figured after a year it might be a good idea to give it a go.
I have had a trading journal previously but didn't stick with it. I originally got turned on to the idea of a trading journal and setting up a goal to improve something new each day (but only one thing). (Got this idea from SMB Capital + Brett Steenbarger - "The Daily Report Card"). Unfortunately, lots of days I wasn't really sure exactly what I should be improving, so found it of marginal value and eventually ended up giving it up.
After a year of trying to learn scalping, I more or less gave up on using order flow exclusively as entry + exit. I decided that basically I had no plan (and as Van Tharp says: "If you don't have a plan, every trade is a trading error").
Recently, I decided that trading the market in a technical fashion was actually quite simple and all I needed to do was rediscovered what I already knew:
1. Have a strategy that will probably work
2. Execute that strategy consistently
3. Objectively measure whether that strategy is working
4. If it's working, keep on doing it; if it isn't throw it out + develop new ones.
(A lot of this was after discovering some Mark Douglas videos - I had already read the disciplined trader but realized a lot of my issues are from "panicking out of trades" (thinking I can know the future). I can provide a link to those videos if anyone is interested).
I see most problems in life as a division between:
1) Process problems: Do I know the right process or steps?
2) Psychological problems: Is there something that is sabotaging my success, despite having the right plan?
(This was taken from Robert Kegan / "Immunity Change")
One way I think about this is in terms of dieting: almost everyone knows a simple way to lose weight is to eat less and move more. And there are countless diets out there that work. Sometimes you just need the right diet; other times you need a psychological shift; and often it's some combination of these things.
So with trading I've been trying to determine: is my problem psychological, or is it process based (having the right strategies)? And in a quest to find out, I've decided to write out a trading plan, and then follow that plan religiously, and look at MAE, MFE, Avg win rate, profitability, etc. of each strategy. The more data, the better, as far as I'm concerned.
Where I'm at right now:
* I've just started measuring some strategies; some which are working, some which aren't.
* I've got a written out trading strategy - https://docs.google.com/document/d/1gAGo3G-Iy2dA3ksden0jj9cPnDdUBgw1Esl9ozqlAtg/edit?usp=sharing
* I'm planning on only evaluating these strategies after 25 trades; at that point, dropping them if they aren't working.
* Keeping in mind the principle of: "If I can't measure it, it's worthless" (aka staying objective)
* Trying to keep the same setups without modifying them.
* I'm still discretionary when it comes to my entries, but once locked in, planning on not moving stops / take profits. Also not changing strategies once they are in place.
I'm aware that I have several blind spots and hope keeping a trading journal (and providing it to the larger community) will be beneficial both to me and others.
I don't plan to journal daily as it takes up a lot of time to do it well, plus I believe that I'll see marginal value. Instead, what I'd like to do is journal once a week and have a plan of one or more things to focus on in the coming week.
* Come up with a new setup that works in low volatility environments
* Follow the plan and keep trading existing "Holy Grail" strategy
* Keep taking profits at 5 ticks
* Never risk more than 2-3 ticks
* Modify stop volume limit in Jigsaw to find optimal setting.
* Attend the many Wealth 365 talks.
Ended up basically even this week - which is progress for me.
All of my live trades were "in plan" which is what I'm looking for.
Volatility has been pretty dead with the summer, so aside from the random news event, things have been pretty slow in the bond market. I'm definitely learning to "sit on my hands" and not trade when something isn't in plan (which is difficult for me).
Since I'm only trading one contract, and trading /ZF (small tick size), this is actually a pretty big accomplishment for me. Of course, the real accomplishment is following the plan, not the P&L:
.
Grand total (after commissions): $0.39
Also working on alternative (mean reversion strategies). I realize that as a noob mean reversion strategies are actually quite hard to trade. But I figure I should keep on executing these strategies, and if they really aren't working (which they haven't been), I can always pull a "George" / Seinfeld and just reverse the trade. (In fact, for one of my trades I saw in the other side of the trade in John Carter's book).
Also, I've noticed the being profitable (at least this week) was more about the trades I didn't take and the limit of risk. The trades that generally work for me work for me right away and I don't take much heat on. It's the ones that don't work that usually may go 2-3 ticks in my direction at most, but usually just immediately go against me and I'm on the wrong side of the market.
That's a very convoluted way to say: I need to limit my risk to two (maybe 3 ticks) this week.
Also, I'd like to explore more about using ATR based stops to work better in changing market conditions. For now, though, I'd like to keep my 2-3 tick stops and 5 tick take profits.
So for next week:
* Keep executing "working" strategies live.
* Keep risk to 3 ticks (2 when possible)
* Keep taking profits at 5 ticks.
* Allow taking any trades AS LONG AS they are on DEMO. (This allows me to develop new strategies and feed my "gambling addiction" without risking real money).
* Keep developing mean reversion + additional strategies on demo until getting 25 instances.
* Finish reading "West of Wall St"
* Investigate / skim John Carter's book.
Not many trades this week; Took a personal day on Wednesday; no setups on Friday. P&L roughly flat. That's OK. I'm happy whether I make or lose money as long as I'm following the system and getting feedback. Even negative feedback is a win as long as I'm staying on point / on strategy.
Slow week although I'm sure volatility will start to pick up into FOMC. Already saw the volatility pick up on Thursday + Friday.
I have been debating going to other markets - specifically /MES since the risk would fit in my tiny account size. But noticed that it too wasn't moving very much early in the week. If summer time trading stays this slow, I'll investigate more volatile markets. But I expect volatility to pick up shortly.
Some other thoughts/observations:
* I started taking screenshots of charts. Not sure if this is helpful, but I have been thinking about printing out these charts and putting them in a binder to periodically review. I have no idea if this would help pattern recognition, but figured it couldn't hurt to periodically review these. So TBD whether or not I'll do it.
* Started, but didn't finish looking for setups in Mastering The Trade. Although coming back to it a second time around it makes a lot more sense. I read the book several years ago, but now have the experience of what the author is talking about (at least in parts). It's funny though how reading about something is not the same as experiencing something.
* Started, but didn't finish looking through "Technical Analysis of Stocks & Commodities" (magazine). This month's did have some interesting ideas about a variant of bollinger bands, though, which may be interesting. Also some other articles that peaked my interest.
* Started looking at Heikin Aishi bars side by side with my regular charts. Not exactly sure how I'm planning on using this but it does make the trend a bit more obvious. I probably won't switch to these charts right now but do plan to keep on looking them side by side as I think more about how to use them.
* Making slow but steady progress on demo trading setups. Nothing is working out so far. That's OK. If I can get the reps in, at least I'm closer to knowing what does work. Plus, I can always play "opposite" and take the other side of the trade.
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For next week:
* Keep trading live 5 tick TP / 2 tick stop - as long as in plan
* Keep trading / experimenting with ad hoc setups - as long as on DEMO.
* Skim John Carter's book for trade setups (so much interesting stuff, it's hard!)
* Skim TA magazine for trade setups
Had a really interesting week, and this was partly because of the market action.
Two big things happened this week: FOMC (wed) and trump's tweet saying that Chinese goods would be taxed @ 10% (thur).
During the second of these events, another bond trader came into the chat room that I'm often in and got into a bit of an argument with the moderator. The moderator then booted him. But the guy made some good points so I decided to pick his brain. And a lot of his claims seemed legit.
(Without getting into it, he criticized the moderator essentially for not knowing what he was talking about. Now I realize that he was upset because he was losing a lot of money - but his claims were largely right in that the moderator has been demo trading for several years and essentially has no skin the game...but, I digress).
Turns out he's trading a really good mean reversion strategy - which works well in non trend / non-breakout markets. Levels (maybe also pivots?) are an important part of how he plays the market.
These sorts of strategies work well most days but then you get killed on the crazy days. They basically work by doubling down when you are wrong (martingale'ing) based on pivot points. I liken it to selling option credit (delta neutral strategies) where a lot of days you are "picking up pennies in front of the steam roller". But I'm going to try to use his strategies on ZT or ZF (with small tick sizes).
He was also very kind by introducing me to a nasdaq scalper who had a private slack chat so looking forward to gaining access to a bigger community.
But this got me thinking about market states. One of my main ideas that I've stuck to is that it's not so much about having a black box strategy that always works, but rather having a class of strategies that work in the right market environments. So buying pullbacks in trends will work, but buying pullbacks in mean reversion markets will cause you get chopped up / etc.
An interesting thing also happened on Thursday. I had a limit order to get long the ZF right before the trump tweet. I didn't get a fill, but this got me thinking:
Let's say I had gotten the trade on - I would have quickly made my profit target. But if I had been trading two contracts and had let one run, it would have made my whole month! I guess such is trend trading.
So this action shows the contrast between the two strategies: trend trading vs. mean reversion trading. I remember hearing a floor trader stating that trading was lots of boring times with the occasional moment of sheer terror. Such is mean reversion trading (or selling option credit).
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More on market types:
I also read / re-read / skimmed the first part of John Carter's "Mastering the Trade". There are so many interesting things in there and in a sort of sense I feel like it's one piece of the puzzle (not the only one, and certainly not the holy grail, but the next step in development after plain jane indicators).
This got me thinking of market types. So far I've been classifying day types as:
But that's not really a good classification. It's more like the market is made of two different states:
1) trend vs mean reversion
2) speed or velocity of moves
This leads to 4 combinations:
1. Trend / Fast. This is often a news day or has a news catalyst. Quick moves happen by big money + news trading algos. It's a shift in fundamentals. This is what happened on Thursday.
2. Trend / Slow. This is the slow grind up during the day. Not huge moves but there is a trend and you don't really want to fight it.
3. Mean Reversion / Slow. This is a day when VIX is low and it's time to fade extremes / tests of pivot points or levels
4. Mean Reversion / Fast. This doesn't happen very often, but I remember FOMC (2?) months ago when price moved up very quickly, then moved down very quickly and basically ended up unchanged on the day.
Overall the fast moves don't happen very often.
The high level idea:
1) determine the day type (note, it can change midday!)
2) trade the right setup for the environment.
What is interesting on John's Carter's book is all the ways he determines the day type:
1. Volume. If a 5 minute YM chart has over 25k contracts traded after 10AM (Eastern?) it's got some heavy volume, so it's more likely to be a trend day
2. Pivot points / major levels taken out - indicates a trend day
3. AUD/JPY carry trade. During these days, rising AUD/JPY = risk on so all assets will rise. Falling, all assets will fall (but bonds and USD will rise). Here's the interesting part: one of the risk-on assets is gold. So during market turmoil, gold can actually fall because start money will be taking off the carry trade and selling gold futures/stocks/etc. and putting it into USD + bonds.
4. VIX levels
5. Put/Call ratio. Over 1 > extreme bearish sentiment to be faded (go long YM), 0.6 to go short.
6. Sector list. Can look at XLY/XLF etc. If roughly 50% are red and 50% green, then it's a chop day.
One general believe I'm developing across things is that those who have a plan and stick to it over the long term are the one who win. And that's in any field / industry. Including long term asset / wealth building, business building, and trading.
And this is something that John Carter emphasizes - that those who chase the market (they have no plan and react based on gut) end up transferring their money to the traders who have a plan and execute it consistently.
Also, he has ways to shift during the day and he is partially discretionary, but he has set rules for when has to get out of trades or not be in the market - and these are based on objective measures (say put call ratios etc).
So I'm really digging this book + guy.
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This week I was completely negative - didn't have one positive P&L (live) trade. This is hard psychologically for me.
But I know this is OK because I executed my plan so can't beat myself up too much - can only learn from it.
But obviously I'm doing something very wrong (as the unnamed bond trader said to me)
An analysis later on the week made me ask: why did I lose money so consistently? And my hunch was that stops that were too tight was a big factor:
So a think for next week I'm going to move to volatility based stops for my pullback trades. Presumably, I should also move to volatility based take profits, but I'd prefer to get some wins under my belt for now.
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So a few revelations this week:
1. Pyramiding based on levels works really well in slow M+R markets
2. The importance of levels + pivot points
3. Letting runners go when trend trading. The importance of trading at least two contracts.
4. Volatility based stops
For next week:
1. Start demo trading the bond trader's strategy on demo (I'll use ZT so that I can continue executing on ZF if volatility is high). I'd like to build up an objective trading strategy before I go risking gobs of money.
2. Make sure to record these trades.
3. Use pivot points + draw major support levels on ZF + ZT.
4. Use ATR based stops. I'll use 1 6-period ATR (usually 3-4 ticks) for stops but continue to use 5 tick take profits for the pullback strategy and stay out of the market when the volatility gets too great (ATR >= 1.5 points)
Good plan. If you have a great black box strategy for trends and a separate one for mean-reversion then the crucial skill becomes figuring out when to trade each system. I think you're on the right path, and I've been enjoying reading your journal so far!
Since volatility came back into the market, I didn't have much of a chance to execute the mean reversion strategies. (I attempted to on Sunday on demo but got blown out quickly). Instead I switched to trading the pullback "holy grail" strategy and it worked well, overall. Here was a rough breakdown per day:
* Sunday - noticed volume at night, no live trades
* Monday - best day in a while just trading pullback strategies
* Tuesday - woke up late, no trades in afternoon
* Wednesday - got chopped up. too much vol. was flat out wrong on first trade but then got both 2nd + 3rd trades right but stops too tight. volatility expansion scared me, fast markets.
* Thursday - happy with performance. Realized the need to "get trade on". Much larger targets than before. No need to get stopped out unnecessarily. 2nd trade didn't work - that's OK. Didn't get a chance to get back in after pullback. Do think there's a "far from moving average" fade trade with minimal risk (but minimal reward) that is possible, although haven't figured out exactly how to execute that yet. But Green Day and more importantly, no impulsive trades + setups worked as expected.
* Friday - good day although didn't like my exit (was short into the close, volatility picked up, and I made an execution error by moving my take profit in).
So main trading lessons from this week:
1. Use pullback structure as stop loss. I'm looking for the right mix of risk vs. reward here. I can get in with a stop entry but then there's more risk on the trade. OTOH, I can get in when it's less certain and more choppy during the pullback. The first method has more $ risk, but also more confirmation.
Two weeks ago I was using a fixed tick stop. With the increase in volatility, last week I was looking for an ATR stop (although I hadn't formulated exactly how to do that, which led to Wed being a day where I was right on direction, but still lost 3x in a row); now I'm thinking I should really use a structure/support stop but only take the trade if it meets my volatility requirements (and step aside or put in a limit order and if I don't get filled - oh well). But still TBD as I'm trying to figure out how to execute this best.
2. I made a discipline / execution error on Friday at the close. Actually two: 1) I moved in my trailing stop a bit too soon. This led to get the trade going against me and then being one tick away from getting stopped out. Error 2) I was roughly even on the week and wanted to end the week green so moved in my take profit and got filled. Turns out it did sell off for the rest of the session and my take profit would have been hit.
I'm still not sure if I consider this a 100% an execution error as the volatility is a bit too much for me at the close and I'm happy with getting the small win instead of holding on. But it was an execution error because it's not in my plan to do so. But still trying to figure out exactly what rules I should use to get out (or if I should just white-knuckle it and stay in).
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I started watching AUD/JPY as a proxy for smart money / risk-on vs. risk off (got this from mastering the trade). The idea being that money flows into the higher yielding currency (AUD) to leverage up + buy other assets when things are risk on, and out of AUD (and into safe haven JPY) when it's risk off. Whether or not that's true, it's certainly another indicator I can look to to determine volatility + where money is flowing.
After reading mastering the trade, I now have the following indicators to measure money flows / volatility:
* put/call ratio. It looks like > 1.4 or so it's heavily bearish, below 0.6 heavily bullish. mostly it stayed around 1.0 so wasn't very helpful this week
* VIX (which I've been using as my main volatility indicator)
* NYSE TICK. I look for extremes at 800, 1000, and 1200 based on Carter's recommendation
* aud/jpy as mentioned above. Friday was interesting as most of the morning was choppy and there was only one extreme reading.
* daily, 5-minute ATR of the market I'm trading
* gold, btc, bonds as risk/off assets
* sector ETFs. I ended up using XL* ETFs although barely looked at them last week.
Another thing I started doing was taking screenshots at the start + end of every trade. I've been recording my screen for over a year at this point (and used to rewatch the videos of my DOM every night at 15x-30x to get a good day summary) but after a few months realized that I wasn't getting much out of it.
This week I decided to start printing out screenshots of my charts, printing them out, and putting them in a binder. So still TBD on how useful that is but at least for this week it was a good way to jog my memory and give me a good overview on what happened on each of the days to solidify the lessons of the day.
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Since I can't control volatility in the market, a lot of what I do next week will be based on how the market responds.
If volatility stays in:
* Keep trading pullback strategy
* Modify trading plan for pullback strategy to go for 2x profit target for 2:1 R:R
* Modify trading plan for pullback strategy to use structure low/high as stop, BUT use volatility stop as max risk on trade
* Start developing a far from MA scalp. See John Carter's book
If volatility increases: (VIX > 20):
* Start trailing stops and don't use take profits.
* Modify the trade plan to handle this
If volatility gets sucked out:
* Trade julian's MR strategy
* OR look for alternative MR reversion strategy where I don't get killed if I'm wrong
Either way:
* start Assembling list of "indicators" that can indicate volatility both for start of day + mid-day
Wow, volatility has really been helping me. Going into Thursday I was worried I'd have a red week, but ended up having the best week in a while.
Of course the money still isn't anything to shake a stick at, but I'm trying to ignore that for now and focus on consistency.
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Monday: 1/2 today. Moved up TP + trailed stop as VIX was *right on edge* of my rules for TP (being at 20 at the moment of the second trade). Ended up getting roughly what I would have anyway if I had just set a TP.
Tuesday: No trades taken. Shortened session for fiancee's dissertation defense.
Wednesday: Lots of volatility before I woke up, but missed most of it in the afternoon and it got really choppy. Still, VIX was high so I wasn't apt to take quick profits. 0/2 on the day. One hint of what I could have done better: ADX was really low when I took my trades, indicating the trend was over.
Thursday: Market was wild today. Huge sell of in ES, huge surge for bonds, with the bonds already past my R1 pivot + past support from high of day. Saw my "holy grail" setup and realized the importance of just getting the trade on (it's usually get it on during a lull in the market). Had a 5 tick stop and 8 tick take profit but decided since VIX > 20 to put my take profit up at R2 (which was ~ 20 ticks away), figuring it wouldn't get there but if the trade went my way I could trail the stops. Wow was I wrong! This ended up being the best trade I have had in ~ 6 months. Huge 22 tick winner. It ended up topping out near S2 + long term resistance. I was able to use my intuition/reflexes to see 7000 contracts trade at high and hit out near the top tick (1 tick off the high of the day). I definitely got a bit lucky where I took profits, but otherwise think everything about the setup was A+ execution and the P&L shows. Later, this uptrend pulled back to my MA and I took the setup again. Unfortunately I quickly got stopped out. Here was the learning lesson for the day: after the holy grail works, don't be real quick to take it again if it falls back to the original entry price (although OK to take it if it consolidates a second time). Why? Volatility is usually wild so risk is high and there's high probability that the price will reverse.
Friday: 0/1 today. Actually got filled long half accidentally via a stop in. Got the fill and decided to manage the trade instead of cutting immediately for a 1 tick loss. figured it still matched my criteria so decided to manage the trade. lost the trade pretty quickly and decided that I was basically done for the day. Good I didn't take another long trade because the market sold off. It definitely felt like a Friday, with volatility dropping. Played a little bit with mean reversion strategies on demo (ZF, ZT), using John Carter's pivot plays for inspiration.
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The more I reflect on it, the more that seems right: know the current regime, then trade high probability strategies that work in that regime.
How to know the current regime? Obviously the things I've pointed to before: VIX, NYSE Tick readings (> 1000 indicates volatile day), AUD/JPY, USD/CHF, GC, BTC, news events. But the more obvious ones that have been staring me in the face recently: ES down more than 50 points on the day (or > 2% change on day for /YM and /ES) and yield curve inversion.
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My holy grail setup seems to be working well for high VIX markets. I think the addition of pivots + s+r, as well as trailing stops to my trading has been a big win so far, especially for take profits.
The contrast between Thursday and Friday couldn't have been greater for me, as Thursday was a huge adrenaline rush as I was actually in on the move. Friday, by contrast, couldn't have seemed more dead.
Although I'm enjoying this volatility and feel like I have a sense of how to make money in high volatility environments, I'm actually looking forward to volatility settling down a little bit so that I can develop the mean reversion strategies further.
One thing that I haven't figured out with mean reversion strategies:
1. Most have inverted risk:reward ratios, so you need to be right a lot
2. I'm often wrong a lot.
I also think inverted R:R might be OK as long as the loss isn't too large. This is after all how I was making money the first year of trading options (an option credit seller). An ex floor trader on chat with traders described trading as days and days of boredom filled with moments of sheer terror. This is exactly what option selling is like for me, as well as high win rate strategies.
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On a (futures) unrelated note, I had my fitbit watch die. I like to run and use it to track my running progress.
I love these watches and the ecosystem but every watch I have ends up defective (malfunctioning once every year or so). What happens when I go to support? They tell me I can get their new watch for 50% or so off. But they never offer to replace it. Terrible service! So I finally said: I've had enough, and decided to bite the bullet and switch to a garmin watch.
This made me wonder: What is their stock doing?
Turns out FIT has been in a huge down trend.
What was garmin's stock doing? In a huge uptrend!
Sounds like a trade idea.
Went home on Friday short 600 shares FIT, long 25 shares GRMN. Also bought 6 of the FIT Sept 4 calls for 0.05 a piece (to protect my 600 shares of FIT in case of gap > $4).
I think this is a great trade, because if the market rises or falls, I should be hedged with the long garmin stock (same for the tech industry or even the sector). Also I win if something really great happens with garmin, or more and more bearishness happens with FIT (which is what I expect). (I'm not that happy with my average FIT price as I've scaled in progressively to it as it's dropped, though.)
Trade was up ~ $125 on Thursday but spread came off on Friday.
The one thing I was worried about going into Friday was: what happens if FIT has a take over attempt and the stock jumps to $6? (I had a stop at $4.01 previously) So buying the 4 calls on Friday will help me sleep at night.
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For next week:
* If volatility stays mid to high (VIX >= 16), keep trading Holy grail setup.
* Keep using trailing stops with large take profits (at pivots/s+r) if VIX > 20
* If changing to low vol (VIX < 16) or low volatility day, start developing an alternative MR strategy.
* Look at John Carter's pivot plays.
* Is there a better way to measure a low volatility day than VIX?
* For instance, on Friday VIX was falling + without news, that seems to suggest trading M/R strategies.
I really like the idea of spreading individual stocks. It lessens directional risk in the overall stock market and you can speculate on relative strength/relative weakness.
ZF (small 
