Martin Kronicle

A reader of mine wrote in, “Trading journals are frequently mentioned but rarely the specifics of what should be in them, tried and tested formats, and, best ways to
review them covered.”

Every successful trader I know keeps a journal or one kind or another. I like to write journal entries, others like to type them into a computer. It might be splitting hairs, but I don’t call them “trading journals” either. To me, they are just Journals and I write everything in them. I rarely write trades in them, that’s what a General Ledger is for.

You should date and time stamp every page that you write on so you can create a chronology. I’d write down whatever is important to you: goals, how you plan on achieving them, in what time frame, thoughts and feelings that you have about your life, and thoughts and feelings that come up in and around your trading.

If you don’t keep a General Ledger because you rely on your monthly statements, that’s too bad for you. You’re missing out on a great way to capture some of your behavior. If you write about your trades before you put them on, they appear much more real. More important, you might find yourself feeling much more connected to your money. One of the potential benefits of that is that you may gain some insight on the importance of keeping your losses small.

I keep several journals going at one time and each contains specific things. You can put everything into one, but I find they are harder to read afterward. I like to consolidate my thoughts and then I create a chronology of all my thoughts and behavior.

If you’re afraid to write down your feelings about a trade or put what you’re thinking about a trade in writing, you’re “closeted.” They are your feelings – own them. You also have a good entry point for your next Tribe Meeting…

In my experience, know-it-alls fear commitments because they might shine the light on their true level of knowledge, which is normally not as high as they’d like everyone to believe. They are the worst type of trader (and people). However, if they can learn to surrender their egos, they may have a chance before they vaporize tons of cash.

You can journal about other things too such as food & beverages (and portion sizes), phone calls/interruptions, and when you feel you need a nap. You can journal what it feels like before you meditate during the day and how you feel after. Time stamp everything. Sometimes I’ll even write in a “to do” list just to keep myself honest. I’ll go back to the list to see just how important all the “to do’s” were and what were the results of getting them done were and how the results have impacted my life, business, or trading.

You can write down how many Diet Cokes you’ve had, along with the times that you had them. You can write about how each of them made you feel, and how you feel about drinking “n” number of cans of diet coke over the course of the day. How many have you had all week. By writing the time down, you can also marry your food habits with your feelings and then conjugate everything with your trading.

Maybe you find that you’ve consistently made losing trades 45 minutes after your afternoon snack, because you’re crashing from your sugar high and you lose focus and get sloppy.

Ultimately, writing things down can give you clarity on your thoughts and your thought process in general. That saying “what gets measured gets done.” But I think what’s more important is “what gets measured can be improved upon.”

There are an endless amount of things you can learn from keeping a journal. But the goal is to learn about yourself and your behavior first, then you can see how it may or may not affect your trading.

I use these Moleskine Journals/Cahiers. They are not lined, so I can draw charts and diagrams and connect a bunch of things with lines. I’m a “pictures” guy, so I like to see illustrations and draw them for things I’m working on.

I left a comment over at Dealbook for the article A Step Toward Defining Derivatives Rules.

If this is the first step they’re taking with regard to swaps regulation, I’d say the CFTC is suffering from some serious ED.

Here’s my comment:

“The proposed plan seems flaccid. The issue has always been the ease of getting the exemption, not the classification of swap user. The “…user-friendly, check-the-box-approach…” still gives potential abusers lots of shadows to work within.

Without more stringent enforcement, exemptions look like they can still be given out like hall passes in grade school.”

This proposed regulation is a soft-off.

A NYT article Day Trading In China a Growing Business, describes a prop trading opportunity for young Chinese men and their payout.

“If the traders make a profit, they keep between 10 and 50 percent, with the rest split between the trading firm and the investor. (If the traders produce a loss, they risk the firms’ clients and possibly their own jobs.)”

John C. Coffee Jr., a securities law expert at Columbia University, says the arrangement amounts to a huge and odd brokerage fee.

“It’s extraordinarily high compensation. If this were happening in the U.S., the fees would be excessive,” he said in a telephone interview. He added that even if the traders could outperform the overall market, “The transaction fees would eat up some of the gains.”

I disagree with Professor Coffee. If you trade for a hedge fund, for example, there usually is an 80/20 split with the client. Of the 20% that the firm receives as the incentive fee or profit allocation, a trader with experience can earn 50% of that, or what equates to 10% of the profits they generate on their trading capital.

If you trade for a prop firm there is a very similar payout.

If you get a job at Merrill Lynch or Smith Barney, how much of your commissions and fees do you think you get to keep at the end of each month? Depending on your overall level of production and assets under management, you’re looking at somewhere between 20 and 50% before taxes and deductions. The latter would be for very large producers. And in the case of prop traders, they are producing absolute returns, not relative returns. A financial advisor in the US can make a few hundred thousand by losing clients money.

It is enormously expensive to run a prop trading firm in a large city, however, I do think that 10% is a little low. It’s not clear what comprises that payout. It might be for the first few months of trading so that the prop firm can recoup some of its training costs.

Professor Coffee may have forgotten the enormous amount of resources that go into training new traders:rent, the utilities, the technology, and the rate of return that has to be paid to the backers. (Not every firm has backers, some just have their own capital).

All in, it’s quite a great thing to get hired at a prop trading firm, have a desk waiting, have expert training, and most importantly, have an allocation of trading capital. Everyone wants to shoot the gun, but no one wants to get the bullets.

Ace Greenberg on his mentor Bernard J. “Bunny” Lasker:

Lasker: “If it goes up a point, buy more. If it goes up another point, call me. If it goes down two points, sell it.”

Greenberg: “This sane, simple advice — unload losers, ride winners — became a source of enduring mystery to me: Why didn’t more investors embrace it? And why did so many, Cy Lewis included, do just the opposite?” He had the self-subverting unwillingness to take losses.”

Ace Greenberg in The Rise and Fall of Bear Stearns

My sort-of-colleague Joe Weisenthal at The Business Insider blogged yesterday that after a $10 selloff, gold was in a freefall.

A freefall? I admit, $10 might be scary for someone who hasn’t seen it before, but a $10 move in gold is like a 10 cent move in a stock these days.

Many commodity traders use the Average True Range (ATR) to gauge volatility, and more importantly, to calculate position sizes. It’s an indicator that you can get with most free chart services.

The 20-Day ATR for February gold is sitting at $23.40. I look at ATR to describe the personality of the contract: that means a trader can expect the contract to move, on average, approximately $23.40 in any direction. At times, it can be directional. Sometimes it’s just intra-day volatility, ie, the difference between the day’s high and low.

It hurts when it’s against you and feels good when it’s with you. It’s unpredictable and that’s why you use it to create positions sizes that you can sleep with.

I’d concede maybe a $50 or more selloff could constitute a freefall, but it’s a subjective measure.

IMHO, we can see another $40 selloff on the February contracts, and still be in an upward-channeling pattern.

Follow Joe Weisenthal on Twitter: @TheStalwart

Follow me on Twitter: @Martin_Kronicle

Check out some of my articles at Business Insider.