I had previously discussed in an earlier post that you should not view trading as a single act but as a process with a number of broadly successive steps.
What’s the final step in this process?
The final step in this process does not occur when you close the trade or allow it to expire and take your profits (if any). No, it’s when you keep a good record of your trade.
Because only if you do this will you be able to learn from the trade and fully accept the outcome.
Learning from Experience
Most authors appear to emphasise the importance of the first of these requirements. There are two aspects to this.
It’s pretty obvious that you need to learn from your experience but that unless you have a way to record and then review what you did then you are unlikely to learn much. Experience will count for little otherwise.
There is a second type of learning also. It is important to be able to see where you are going right and wrong in current time.
This differs from learning from experience as it focuses not on your self-development or on looking for improvements to your system but on recognising the environment in which you are trading.
Specifically, you need to know how the market is performing at any point in time. To do so, you need to characterise a market according to 6 factors in 3 categories:
- balance – flat or trending;
- bias – up or down; and
- noise – quiet or volatile.
Sometimes a market will be flat, at other time trending. It will usually have a bias either up or down, even if there is no real trend as sentiment is not usually fully neutral. Sometimes it will be quiet, other times volatile.
This characterization is not a direct input into your trading decision and can be done fairly informally by looking at a chart and perhaps comparing an indicator such ATR (Average True Range) to a moving average of the indicator.
The purpose here is to help you to identify the appropriate setups to use in each market type.
You will only see this if you note the market type and record the performance of any setup you use according to market type. This will take time to be of use as you will need a substantial number of trades to provide a useful dataset.
It is then important that you are able to use this information when you see the type of market that currently exists.
Accepting your Trading Outcomes
The relationship between recording your trading outcomes and emotional control may be a little less obvious.
I have written in a previous post about the importance of accepting the outcome of any trade if you are to control the emotions and stresses that come with trading. Keeping good records has an important role to play in achieving this.
If you record your decision making and your performance then it will help you to avoid the dangers of greed as you will be more likely to keep to the rules and know what to expect.
It will also help you to avoid regret and move on to the next trade if you see recording and reviewing the trade as the final act in relation to every trade.
Once this is done, and this is an impartial recording process with none of the stresses of making a decision, then the trade is done with. It’s a way to release yourself from any emotional attachment to a trade that might have gone poorly.
No Single Trade Ever Matters Much
There is another important aspect to this also. If a trade goes against you then it is only natural to feel a bit disappointed. However, losses are inevitable and so you just accept it. See this post for more on this.
Provided you have controlled your risk then the outcome of the trade has no lasting effect on your trading fund. If you did not control your risk then that’s a problem to address before you consider trading again.
Recognizing that it is not the outcome of any particular trade that matters but it’s your performance over a sizable number of trades is a key development in becoming a successful trader.
Keeping good records will help you to make this mental leap.
Answering the Big Questions
If you keep good records you will build up a dataset from which you can extract information. Each trade simply contributes to this database.
Each trade is quite meaningless in itself – provided you kept to the rules of your system – since the large number of random variables that drive markets mean that the outcome is to a large extent the product of these unforeseeable factors.
But because these are random with regards to your decision making, their impact cancels out over time and your performance is a result of, and an indication of, the viability of your trading system and your ability to implement it.
Look how far this view has moved from viewing the outcome of a trade through the emotional attachment that often accompanies both wins and losses.
And there are no uncertainties with this approach. Provided you input good data and you calculate appropriate metrics and interpret them properly you have unbiased information on your trading.
And unbiased information is the basis for good decision making in relation to the big questions:
- Do I have a profitable trading system?
- Am I implementing it properly?
- Do I need to alter any aspect of the system?
- Are there improvements I can make?
- Do I need to examine my own mental processes?
These are important questions and you must be able to answer them with confidence.
But you never attempt to answer them on the basis of any one trade unless you have very obviously broken basic rules of the system.
Recording as Emotional Control
So recording your trading experience, the decision process involved and the outcome of each trade is important as an aid to removing the impact of emotions on your trading.
This is not immediately obvious. But by seeing this final stage as an integral part of each trade you are freed to move on to the next trade.
This is not a trivial process but it need not be overly complex either. You can set up a simple spreadsheet program very easily yourself where you record the facts. This will certainly be better than nothing and will do at the start.
However, it’s more complex to identify the types of information you need to extract to be able to answer the questions above. Keeping a recording of your fund size is straightforward but additional metrics such as return on investment, return on risk and so on need a bit more thought.
You should also be able to see how often your outcome was the result of a good trade or a bad trade. If you are unsure of the difference between these two types of trade then have a look at this post.
The 4x4RecordKeeper is designed specifically for Binary Options traders and will get you recording system up and running in a few minutes. To find out more, there’s a description and some screenshots here.
Whether you decide to purchase the ready-to-go system or spend time designing your own, the important thing is that you don’t ignore this aspect of trading.
Find out more about the 4x4RecordKeeper