Write Down Your Thoughts
Have you ever made a dumb mistake? Perhaps you knew you should have used a protective stop before leaving for two days to take your children on a road trip. You may have thought, "I'll stop off at an Internet café and monitor the trade." But it didn't happen. You got wrapped up taking care of your children or worrying about traffic, and you didn't get around to looking at the market. It fell hard and you lost more than you had planned. In hindsight, you probably thought, "I knew it would happen, but I just didn't care." For some traders, it's the little things that knock them off balance: the argument they had with their spouse, or staying up too late visiting with friends the night before a significant trading day. Whatever they are, these little things can make you feel tired and on edge. Suddenly, you make trading errors that would not have made sense in a more rational state of mind.
How do you prevent little things from getting the better of you? One way is to keep a diary of your thoughts and emotions during the trading day. For example, on the day of making a trade, you might write down the events in your personal life that happened before the trade and how you felt about these events: "I had a dinner at my neighbor's house and we lost track of time. We talked about interest rates and how the markets were down for the second straight week. I was a little worried about what might happen the next day. I didn't sleep well. I woke up tired the next day. And then, my spouse forgot some important papers at home and I had to fax them. It didn't seem like a big deal at the time, but I guess I was angry that I had to take time out of my busy schedule. I was tired and a little frustrated. In the back of my mind, I felt that I hadn't been performing at my best. I guess I really wasn't looking forward to putting on a trade that day. My heart wasn't in it. I tried to follow my trading plan but I did not succeed.
In this diary entry, you can see that little things were the culprits of a losing trade. The trader was not in an optimal state of mind. That can happen to traders. They can just have a bad day. A bunch of little things come together to make a big problem, and trading plans are ruined. How does a diary entry help? By keeping a description of your trades, even if you don't log all of them, you can look for patterns that interfered with an optimal state of mind. In this case, staying up too late and feeling frustrated by having to do something the trader didn't want to do put the trader in mindset that was not conducive to trading. A trader may find that specific events predispose a bad mood or feelings of frustration. For this trader it was not getting a sound night's sleep and dealing with interpersonal hassles. For other traders, it may be missing a day at the gym or hearing bad news about family and friends. Whatever these events are, it is useful to identify the specific events that mess up your trading plan.