One of the best practices when it comes to trading is to have a trading journal. Think of a trading journal as your battle plan / strategy. Traders should spend time to analyze the market ideally during the quiet period, such as the Asian session and plan trades for the coming session.
When I get to know new traders and talk with them, I sometimes get a feeling that trading sounds like a fun game where you can easily go in and out of the market without much thought and expect to succeed. A person who approaches trading like this will usually last a few weeks / months and then disappear.
In reality, trading is a serious activity and requires a lot of thought if you want to have a chance to succeed. You are competing and trading against professionals and the best of the best in this field: Senior and experienced traders in big banks, High Frequency Trading algos designed by PhD wizard, hedge funds managed by experienced traders.
In retail trading, people like you and me have the benefit of being able to move in and out the market quickly. The same thing is not true if you manage billions of dollars. For example, you can’t simply get out of all your billion dollars position when a certain “stop loss” is triggered due to some patterns being “invalidated” as you can’t expect to easily get out of all your position without affecting the market and enlarging your losses in the process. As retail traders however, we have the benefit of going in and out of the market without distorting or affecting the market.
I like to use the analogy of professional sports team to illustrate trading. Imagine you are competing against a pro NBA team, and you don’t even have a plan. You think you can win by yourself by just dribbling the ball and competing against the Lebron James of the world. But that’s unfortunately the mentality of many retail traders when it comes to trading. They expect to win and have unrealistic return expectation when competing against other pro traders.
Using the same analogy, imagine you expect to always score on your opponent, and you don’t expect your opponents can score anything on you. And since you don’t expect your opponents can actually win over you, you play no defense at all. This is akin to traders who have no defensive plan in their trades. They have no stop loss. They don’t understand the placement of a logical stop, and they don’t understand the proper size when they trade (i.e. overleveraging). Aspiring new traders search their entire life and put all their effort to find a holy grail in trading. The truth is there’s no holy grail in trading, just like there’s no NBA team that can score 100-0 vs other NBA team.
In pro basketball, defense wins championship. That’s the reason why only a complete team who can play a balanced offense and defense has a shot to winning championship. I believe one of the biggest obstacles for aspiring traders is the defense part. The paradox in trading is this: The fear of losing money can lead a trader to lose all of his / her money. Traders who don’t want to lose money and who fear losing will not put any stop loss and just let the losses run until their account got wiped out. The fear of losing money does not save them, but it actually kills them.
To avoid all of these pitfalls, one of the best practices is to have a trading journal. A trading journal should at minimum contain the following information:
1. Instrument name
2. Trading plan (long / short)
3. Entry level
4. Stop level
5. Target level
6. Risk:Reward calculation
7. Rationale for the trade
Traders who do not have a complete system and never plan the trade will have a hard time to succeed in trading. It’s for this reason that in Live Trading Room, we keep teaching and emphasizing the need to plan to help traders and our members. Our analyst will create his own trading journal and share it with those who attend the session, a journal similar like the one below:
Please note the journal sample above is old (July 19) and everyday our analyst will provide a new journal, so don’t use the old journal for current market condition. It’s our hope that with this added service in EWF, members can have the discipline to plan carefully before their next entry order.
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