What I wish to discuss is a vital tool that I always require of any trader I mentor (and I have mentored many over the years). That is: Keep a Trading Log. While this is key and very important for a trader it is also a very good idea for the active investor.
A trading log tracks every order entry and cancellation, not just every trade. Time, option price, price of the underlying and most importantly: why. Why am I entering or cancelling this order, doing this trade? The reason could be fundamental, it could be technical, but there has to be a reason. And, I’m going to get a little “touchy-feelly” here but it’s important. Also make note of what you are feeling at that moment. The greatest enemy to successful trading is emotional trading. In particular those twin enemies of trading success, Greed and Fear. Greed makes one take profits too quickly or hesitate to take a loss and Fear makes one hesitate to take advantage of an opportunity or let a winning trade run.
Trading Log Stardate 2013
A trading log tracks every trade, exit as well as entry. There has to be a good reason for getting out as well as getting in. Taking a small loss is always a good reason to exit a position, by the way. In my career some of the best trades I have made involved taking a small loss before it turned catastrophic. There has to be a good reason to take a profit, though. One of my favorite market axioms is “A good buy is no excuse for a bad sale”.
A good question to ask one’s self when selling a winning trade is “If this is a good price to exit a long position is it also a good price to sell short?” Have a reason to exit and taking a profit is not necessarily a good enough reason.
Having said that, let me add a caveat. Taking off half of a position so the the other half is paid for is a great reason to partially exit a trade. In trading parlance we call this “taking a double”. For example, let’s say I buy 10 contracts at 2 and it goes to 4. If I sell 5 contracts at 4 I have the remaining 5 for free. I am now, in fact, playing with House Money and that’s always a good idea. Taking a double is a great way of keeping greed in check as well. There are few worse feelings in the world then seeing a winner turn into a loser without taking any profit at all.
As I said, while keeping a log is vital for a trader it’s also a great idea for the active investor. So, as the starship Captain might say, “Log that trade, Commander”. Thanks for reading.
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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.