The image to the left should be recognizable by most of us as the American alphabet. It is from these 26 letters that billions of people are able to communicate on a daily basis. We learn the alphabet early on with rhymes and rote memorization so that we may contribute to society through our interactions. We all progress at different speeds, but eventually we all get to the point where we can recognize all the letters in the alphabet. It is at that point that we build upon that foundation and begin to spell words like C-A-T and T-R-E-E. These words are then combined to form sentences which consist of several words. From those sentences we form paragraphs and so on until we are able to write and communicate with others through pattern recognition.
This ability of pattern recognition isn’t anything new or even earth shattering–it’s common sense. Just like the alphabet, which is in a pattern, we can discern the different patterns in lots of things. Take a look at the image below and you can recognize a pattern as well where there are higher highs and higher lows. Unlike the alphabet and some other patterns that have a beginning and an end, some patterns are continuous. Such would be the case for a chart that shows price action in a publicly traded company.
We could begin to see patterns in the line above and learn to predict or assume what has the higher probability of occurring next. As an example, looking at this pattern above we might safely assume that the odds are greater that the line will move lower from here as it has in the past. This does not necessarily mean that it will, but the odds are in the favor of such a move. It is this assumptive process that will serve not as an ends, but more of a means to and end. This pattern recognition assumes that the next move would be lower and thus helps us to proceed further. Information that we’ve gathered from the past can help us predict what the future may hold and this is the basic tenet of technical analysis.
Technical analysis can even be performed on your own trading account and patterns begin to emerge where you can recognize when your trading is “on” as your account grows and when the dollar amount pulls back you can assume that your trading is “off.” This ability to recognize the patterns as your account fluctuates in price is a decent beginning, but nowhere near the wealth of information that can be gleaned from your trading history.
Trading journals are one of the most underused indicators that every trader has at their disposal. Why is it that such a powerful indicator is underused? I’d venture a guess that a majority of traders don’t keep a trading journal because of the time it takes to keep one. I could be wrong, but over the years as I’ve mentored traders from all walks of life, time was the number one reason for failure. Second on the list was not knowing what a trading journal was so after reading this article, you now have no excuses as to why you don’t keep a trading journal.
Below is a list of what I’d recommend to have in a trading journal and, as with anything in life, you’ll get out of the journal what you put into it.
If you are able, ATTACH CHARTS TO ALL ENTRIES! Remember the pattern recognition? Something may not have stood out in the heat of the moment, but several weeks later you may see similar chart patterns to this one. It is at that time that you begin to find common threads and themes of your trading which will allow you to exploit those things you do well and avoid those things you do poorly.
The above should be easily done and would suffice for the most part. However, if you really want to excel at this then a comment section is where the real clarity comes from as you listen to yourself. Take a moment and run through questions like this to get a better understanding of what’s going of for you at that moment and document it. Here’s some examples of what you could ask yourself: