The Chicken or the Egg?

BellaMike Bellafiore's (Bella's) BlogsLeave a Comment

Hi Mike, 

First of all, I want to thank you for being such a great mentor. I’ve learned so much by reading SMB Capital blogs. I’m currently working a full time job as a Mechanical engineer and have taken trading four years ago, fascinated by this machine we call Mr Market. Obviously due to my day time job, I consider myself more of a swing trader. I’m a big believer of process, and I have come to learn the hard way that without my journal I will never become the trader I envision to be one day. I look back to when I started trading and I remember the countless hours I spent reading books, trying to find that “Holy Grail”, looking for that delusional quickest path to success. The other day I came across this picture from a blog and I have to admit it perfectly summarizes what my journey to success REALLY looks like.  I believe I will get there one day, and if i’m 90 when I do, so be it, because what matters is the journey and not the destination, right 🙂 ? So back to my question…

I’m in the process of trying to come up with a standardized way of recording my actions and thoughts in my journal. I’m thinking that having a series of questions for me to answer would be the best way to capture that type of information. So this is how I do it….

Every time I perform an action such as :

  • Open a position
  • Scale into a position
  • Scale out of position
  • Close a position
  • Adjust a stop
  • Adjust a target

I simply ask myself what are my reasons behind taking one of these actions. These type of entries go into what I call the live journal, because they are entered immediately after a trade is placed and my reasons behind the action are fresh in my mind.

After a trade is closed out completely I usually wait a few weeks before performing what I call the feedback journal. The reason for waiting a few weeks is to get a bigger picture of the trade and to observe how price behaves in the following weeks after my position was closed. For example, this will give me better clues on whether I’m consistently taking profits or closing out a trade too early and allows me to adjust my rules accordingly for the given trade setup and market environment.

Other important aspects I add to my feedback journal is:

  • Analyzing the 10 best and 10 worst trades and trying to quantify the differences.
  • Tagging my trades with error codes, to track and look for mistakes that are more common or prevalent.
I also have an emotional journal which is partly a Google spreadsheet form which I fill out to gauge my emotional and physical well being.

I’m currently struggling in coming up with an objective way of grading my trades. I believe a trade must be graded based on execution. But sometimes a trade is perfectly executed and it may still end up with a loss. So the question is, is it me ? Are my rules flawed? Is it the market ?

There are many ways I would try and address these questions.  How would you address this question ? How do you distinguish an A trade from an F trade objectively ?

Great question.

So I guess I have a bit of advantage over you and that I do know a good trade from a bad trade while in the trade.  At first your question stumped me and I needed to have a conversation with a new trader on our desk about your question. New traders on our desk have an easy time of understanding an A trade from an F trade because they are taught which patterns are good and which ones aren’t. They understand the risk/reward for each of their trades because they are taught the potential target and loss for each set up.

You seem not to be sure whether you are making a good trade or bad trade since you lack market experience. The result of the trade is not enough. The risk/reward in the set up is the answer to whether you are making as we say One Good Trade. But how can you truly know if the set up offered a great risk/reward without first having experience?

I am not a huge fan of copying the work of experienced traders. But what is helpful for a newbie is to learn the patterns that experienced traders trade. And then trying to make those patterns their own. With these patterns they at least know the difference between an A trade and an F trade and then they can do the work like you are doing above to master the set ups that make the most sense to them.

So in short you need to start with an understanding of the set ups that are worth your attention. For that it seems a good training program would help.

Mike Bellafiore

One Good Trade
The PlayBook

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