Good Record-Keeping & Conclusion

Jul 3, 2020
12 min read

Updated: Jul 4, 2020

Good record-keeping is the best tool for developing & maintaining discipline. It ties together psychology, market analysis & risk management

Disclaimer: content is summarised from Part 11 (Chapter 57- 59) & the Conclusion of 'The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management' by Alexander Elder

Good record-keeping is the best tool for developing & maintaining discipline. Write down trade plans to ensure you do not miss any essential market factors. Good record-keeping saves you from stumbling into impulsive trades. Constant reviewing & reflection of records allows you to learn from mistakes.

Invest hours in doing homework & accept the pain of having your stops hit. 3 key components of record-keeping:

1. Discipline begins with homework

2. Discipline is reinforced by writing trade plans down

3. Discipline culminates in executing those plans & completing trade records

Feel free to personalise these documents. Markets are huge & diverse. There is no “one size fits all” system of analysis, trading & recordkeeping.

1. Daily Homework

Routines set you on the right path, leaving your mind free for strategic thinking. Have a routine for the market: a sequence of steps for touching base with key factors that may dominate today’s trading. Get in gear with the market before opening, alert & ready to act.

Elder uses a spreadsheet for pre-open routine. It is based on how he views markets, filled with links to help him reach websites for information.

He keeps adding & deleting lines. Modify it to suit your preferences. After filling out the spreadsheet turns to open trades & review stops & profit targets. Review short list of candidates, focusing on planned entries, targets & stops. In gear, hence ready to place orders. Practice this even when not planning to trade.

Begin by looking at overseas markets, major news, key currencies, key commodities, & key stock market indicators (15 min with practice).

1. Check Far East Markets: Link to relevant page on Finance.Yahoo.com. Write down overnight % changes for Australia & China.

2. Check Europe markets: Write down % changes for German DAX & UK FTSE. Feel for how a wave generated in US travels to Asia & then to Europe, before returning to US.

3. Economic Calendar: Link to page at Briefing.com listing fundamental reports scheduled to be released each day. It shows previous no. for each release & consensus forecast. E.g. when important reports like Unemployment / Capacity Utilisation beats / misses its estimates, expect market fireworks.

4. Marketwatch: Website for the masses. See what the crowd is being fed. Occasionally it suggests contrary opinion trades.

5. Euro: Write down current price of most active futures contract & initials for Impulse system: green / blue / red for weekly & then for daily. This format is used for all other markets below. 1. There are stretches of time when euro currency is in gear / against U.S. stock market. 2. Sometimes Euro futures offer nice day-trading opportunities.

6. Yen: Second reason above applies here more than the first.

7. Oil: Lifeblood of the economy. Oil futures rise & fall with its ups & downs. Oil futures can be traded.

8. Gold: Sensitive indicator of fear & inflationary expectations. Also a popular trading vehicle.

9. Bonds: Rising / falling interest rates is a major driver of stock market trends.

10. Baltic Dry Index: Sensitive leading indicator of world economy. Represents cost of shipping dry goods like textiles from Vietnam to Europe. Is very volatile & absence of any trading vehicles based on it helps BDI reflect true economic activity. Useful if trading shipping industry stocks.

11. NH-NL: Best leading indicator of stock market. Write down latest weekly & daily figures every morning as a refresher.

12. VIX: Volatility index, “When VIX is high, it’s safe to buy; when VIX is low, go slow.”

13. S&P 500: Write down yesterday’s closing price & add Impulse system initials for weekly & daily.

14. Daily value: Switch to daily of S&P & note if latest bar closed above / at / below value & relation to channel lines. See if market is overbought / oversold.

15. Force Index: Note if its 13-day EMA is above / below center-line & any divergences.

16. Expectation of S&P candle: Test accuracy of your market expectations by writing down prediction if market closes above / below today’s opening price. Next day, colour box green / red if predictions were right or not.

17. Summarise by stating how to trade today: actively / conservatively / defensively (closing trades only) / day-trade / no trades at all.

Are You Ready to Trade Today?

There are times when you feel in gear with the market or out of touch. Mood, health & time pressures influence ability to trade. Hence, each morning, take a 30-second psychological self-test for an objective rating of readiness to trade. Modify it to fit your personality & ask questions most important to you. Any self-test must be short & specific.

A zero rating on some questions warns not to trade. If no trade planning was done / busy schedule, stand aside / place only exit orders.

Take this test after doing your homework:

1. How do I feel physically?

A. Feeling ill = 0

B. Feeling average = 1

C. Feeling excellent = 2

2. How did I trade yesterday?

A. Lost money = 0

B. Both made & lost money / did not trade = 1

C. Made money = 2

3. Have I done my trade planning this morning?

A. Not prepared = 0

B. Somewhat prepared = 1

C. Well prepared = 2

4. How is my mood?

A. Poor = 0

B. Average = 1

C. Great = 2

5. How busy is my schedule today?

A. Very busy = 0

B. Normally busy = 1

C. Pretty open = 2

Spreadsheet sums scores & uses Excel’s conditional formatting to colour summary cell. Red if score is 4 or less: do not to trade today. Yellow if 5 /6: trade very cautiously. Green if 7/8. Yellow if 9/10: things seem perfect but any change is bound to be for worse. Do not let recent success go to your head.

2. Creating & Scoring Trade Plans

Trade plans must specify strategy used, to prompt you to check dates of earnings & dividends / contract rollovers. This saves you from being blindsided by predictable news. Write down planned entry, target, stop & trade size. Plan written before entry gives sanity & stability in the middle of a storm; ensuring you do not overlook anything essential.

A good plan includes a scale for measuring its quality. Objective rating takes less than a min & encourages implementation of only better plans.

Elder writes out trade plans on preprinted forms 'Tradebills' (similar to waybills that come online packages; shows name of the product, quantity, your address, other essential facts)

2 separate tradebills per trading system: 1 for buying, 1 for shorting.

With potential trades, decide which system it fits (do not trade if it fits no system) Pick up appropriate blank tradebill & write down date, ticker symbol & score that potential trade, as shown below. Only proceed to complete trade plan if score is high enough.

Method for scoring was developed after writing down trade plans for years. Habit of scoring plans was reinforced by book 'Thinking, Fast and Slow' where simple scoring systems make decisions more rational & less impulsive.

Scoring Your Trade Plans (a Trade Apgar)

Trade Apgar provides objective ratings for potential trades by deciding which trade ideas are strong / weak. Word of caution: this scoring method is designed for Elder's “false breakout with a divergence” strategy. Other systems require different tests. Use this a starting point for developing a test for your own system e.g. replacing indicators with RSI & Stochastic & added questions relevant only to option writing.

Trade Apgar demands clear answers to 5 questions that go the heart of a trading strategy. Keep no. of questions to 5 & rating your answers on a 0 / 1 / 2 point scale. Simplicity makes this test more objective, practical & quick.

While looking at a potential trade, take a blank tradebill & circle answers to 5 questions. Circles in red column earns 0, yellow 1 point & in green 2 points. Write each no. in score box & sum. If circle red column write what price warrants a more favourable yellow / green (for potential entry later)

Less than a min. to generate Trade Apgar for any stock. Complete trade plan for trades with 7 or higher & with no 0. Plan: establish entry, target, stop, size to trade, etc.

Trade Apgar (long; divergence with a false breakout)

5 questions from 0 to 2:

1. Weekly Impulse: 0 for Red, 1 for Green, 2 for Blue. Red Impulse prohibits buying, Green is OK but could be too late, Blue (after red) shows bears losing power: buy

2. Daily Impulse: same questions & ratings on daily chart.

3. Daily price: 0 if latest price is above value (may be too late to buy), 1 if it is in value zone (ok to buy), 2 if below value on daily (could be a bargain).

4. False breakout: 0 if none, 1 if it already happened, 2 if it is going to happen.

5. Perfection: 0 if neither timeframe, 1 if only 1 timeframe, 2 points if both look perfect. Analyse markets in 2 timeframes; 1 must show a perfect pattern. Very rarely both timeframes are perfect; it is fine for 1 to be perfect & other to be merely good.

Trade Apgar (short; divergence with a false breakout)

Mirror image of Trade Apgar long (example above), using the same strategy.

Using a Tradebill

Trade Apgar confirms idea for a trade. Tradebill helps focus on key aspects of trade. Elder designed Tradebills in PowerPoint, fitting 2 a page. Tradebill for shorts are same, except for a different Trade Apgar. With your own tradebills, you may want to copy part 1, 3 & 4, but develop your own part 2; the Trade Apgar for your own system or strategy.

Tradebill (long)

Part 1: Trade identification

Green stripe marks it as a long trade. Thumbnail of bullish divergence with a false breakout is a reminder of the strategy.

1st box: ticker symbol

2nd box: next earnings date (look up www.Briefing.com / www.earnings.com / www.Finviz.com). Avoid holding stocks whose earnings are about to be reported. Bad reports can do serious damage. Writing down that date forces you to focus on avoiding trouble.

3rd box: dividend date (if any). Look up at http://finance.yahoo.com. Dividends create tax consequences for longs, while shorts have to pay dividends & want to avoid holding on that day.

4th box: date of plan

Part 2: Trade Apgar

Each strategy demands its own Apgar. After summing no. for Trade Apgar, ask: "Is this an A-trade?" If total score is below 7, do not trade.

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

5 boxes at left edge answers general state of the market. Is Spike Bounce signal in effect? Is indicator that traces stocks above MAs bullish / bearish? What is short interest in stock & how many days to cover? Last box is for a few words of a summary. 3 boxes linked by arrows are at the heart of decision-making process. Entry, target & stop. Dollar risk: How much are you willing to risk? Never exceed 2% of account equity. Size: How many shares / futures contracts to buy, based on risk & dist. from entry to stop?

Part 4: After entry

A target is 30% of daily channel height. Soft stop is to be kept in mind while hard / catastrophic stop is actual order. Put in the price level at which you will move your stop to breakeven. Check boxes on the right as you perform these essential steps: place a stop, create a diary entry & place a profit-taking order.

Part 5: The copyright line

Line shows when tradebill was updated.

3. Trade Journal

Keeping detailed trade records feels burdensome; but serious traders do it. Detailed diary is a selfimprovement tool. Diary entries serve as your “extra-cranial memory”; a tool for building structure of success.

Elder & Kerry Lovvorn created a web-based Trade Journal in 2012. Use it for all trade diaries. It is designed to make record-keeping simple & logical, to plan, document & learn from trades. 3 Key Demands for Every Trade is a section of the Trade Journal (Setup, Risk & Parameters). Defining Your A-Trade & System shows Strategy Box in Trade Journal.

Trades entered & exited at the hard right edge of the chart are now in the middle where you can re-examine decisions & learn how to improve them.

(A): Reason for entry Elder usually leaves it blank as he likes to write such comments on charts, using SnagIt software. For ADSK, he attaches a combination chart, featuring weekly, daily & 25-min charts.

(B): Documenting entry & exit dates & prices; accounting for slippage & seeing buy, sell & trade grades.

(C): Reasons for exit with an attached combination chart showing entry & exit.

(D): List of exit tactics is longer than that of trade strategies. May exit as trade hits target / hits stop / reaching value zone / reaching envelope / trade is going nowhere / trade is starting to turn. 2 negative exits: cannot stand pain of trade / recognising a junk trade after entry.

(E): Post-trade analysis. Return to trades 2 months after exit & review it with benefit of hindsight. Create a follow-up chart, mark entry & exit with arrows & then write a comment on how trade looks after passage of time.

Follow-Up Analysis (Shorting a Top)

DISCA daily with 13- & 26-day EMAs & 6% channel. Impulse system with MACD-H 12-26-9. (Chart by Stockcharts.com)

Strategy for shorting Discovery Communications, Inc. (DISCA) was “fading an extreme” & exit tactic “started turning”. Entry & exit are marked by arrows. Review 2 months later confirms both decisions were correct. Lesson: next time I see this pattern, jump aboard.

Follow-Up Analysis (Buying a Pullback)

MCP daily with 13- & 26-day EMAs & 16% channel. Impulse system with MACD-H 12-26-9. (Chart by Stockcharts.com)

Strategy for buying Molycorp, Inc. (MCP) was “pullback to value"; Elder thought that a new uptrend had begun. Following day, he was unsure thus, sold for a small profit. Review 2 months later showed he missed resumption of bear trend; decision to cut & run with a small profit was correct, but he overlooked a major trade. Lesson: continue to monitor closed-out trades for a week or so; prepared to re-enter / reverse.

3 Benefits

1. Sense of Order & Structure

This immediate benefit comes from documenting plan, entry & exit per trade. Defining & writing down these numbers is essential in disciplined trading. Less likely to impulsively buy / overstay profitable trades / let a losses snowball without a stop. Risk management numbers gives trade sizing. Documenting exits gives trade grades.

2. Reviewing Every Trade 1 / 2 Months After Exit

Best way to learn is to review decisions made in the past. Trading signals that were vague & uncertain at right edge of a chart become crystal clear when viewed in middle of your screen.

Make strategic decisions on weekly charts & tactical on dailies. Elder's daily charts are formatted to show 5 - 6 months of data. Once a month, spend a few hours to review trades closed 2 months ago. Pull up current charts, mark entries & exits with arrows & comment on each trade.

Teach yourself what is right & what needs to be changed. E.g. Elder became aware of 2 problems with his exits. He noticed his stops were a bit tight & allowing him to greatly reduce no. of whipsaws by slightly increasing amount of risk. He also noticed that while his shortterm swing trades were decent, he often missed bigger trends emerging from those short-term moves. Thus, he adjusted his methods going forward.

3. Reviewing Your Equity Curve

After accumulating dozens of records, have several ways to analyse them & learn from your equity curves. Successful traders have a rising curve. If it is not rising, track the problem down & solve it be it your system; risk management; lack of discipline.

A combined equity curve for all trades & accounts is a pretty crude tool. Trade Journal allows you to zoom in & trace your equity curves for specific markets, strategies & exit tactics. E.g. Elder vows to always use stops after seeing equity curve for exits marked “could not stand the pain”.

4. Conclusion

We have covered essential trading topics: psychology, tactics, risk management & record-keeping. Still, becoming a successful trader will take more than reading a single book.

10,000 hours to master a skill? How about 20 hours from a book "The First 20 Hours: How to Learn Anything... Fast!" Author Josh Kaufman states that while becoming a world-class expert will take years, achieve a basic level of competence in most fields in a much shorter time.

“Early hours of practicing something new are always the most frustrating.” To learn a new skill, find experts, get their materials, create an action plan & make an absolute commitment to studying & practicing without any distractions. With 20 hours of focused, deliberate practice, go from near 0 to performing reasonably well in many fields. Kaufman took 20 hours to learn new skills like windsurfing & website programming.

Intellectual demands of trading are not high. We deal with only 5 numbers: open, high, low, closing prices & volume. Main difficulty is emotional. Strongest feelings of greed & fear.

New traders focus on money, dreaming about what profits will buy, throwing caution to the wind. They may buy, doubling up on margin & head in with no trade plans. When a trade turns against them, emotions swing from greed to fear. They freeze up, while market grinds down their accounts.

Technically, trading is not very hard. Psychologically, it is the hardest game on the planet.

Reduce stress of trading with several essential rules:

■ Trade small sizes while learning

■ Do not count money while in a trade

■ Use risk management rules, primarily the 2% Rule

■ Write plans down, especially entry, stop & target

■ Keep a trading diary & review it at least once a month

Most traders are terribly isolated & never see how others practice their craft. This contributes to impulsive trading. Private traders who violate rules & make gross errors remains invisible to others. Nobody warns him to stay out of trouble / praises him for a good trade.

In the old days, brokers knew what we did, but with online orders, the only human to contact you about trades is the margin clerk at a brokerage firm.

Elder suggests SpikeTrade.com (run by Elder & Kerry Lovvorn) to prevent isolation, seeing what good traders are doing, & being rewarded for performance. Traders share ideas & advice, engaging in a friendly competition & commenting on each other’s trades.

Trading is one of the hardest pursuits on Earth, but it is an endlessly fascinating adventure that can be very rewarding. Elder has been on this journey for decades & still looks forward to every Monday, when markets reopen. "While trading has made me free, I still catch myself making occasional mistakes & have to concentrate on my discipline. I reserve the right to be smarter tomorrow than I am today. It is a great journey, and I look forward to sharing it with you." - Dr. Alexander Elder New York, Vermont, 2014