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The Cost of Second Guessing Trading Strategies (Why You Need A Written Trading Plan and Log)

During my twenty years of trading, I have learned that the best recipe for success is to follow and execute my trading plan. The cost of second-guessing my written trading strategies shows why you need a trading plan.

In this article, I provide hard facts about how my second-guessing and discretionary trading reduce my profits.

Why I keep a trading journal

I keep a detailed log of all my trading activities, both day trading, swing trading, and long-term positions. I believe this is the only way I can improve my trading. Please read the trading journal example.

However, doing all this “extra” work is not precisely the most exciting job on this planet, but I believe by far the most important I can do to improve my results. The more parameters I put in, the more exciting testing I can do some months later!

Doing the records might be boring, but I enjoy drinking coffee and eating cheesecake while studying my trade records.  I can see where I go wrong.

One of the things I do is to record P/L throughout the day, even if I have already realized the position, to improve my exits. Specifically, I record P/L at six different time intervals before the close. I later check the results against some other parameters.

Based on all the parameters I use, I can track every trade pretty well and make all my trading as mechanical as possible. I’m not very good at discretionary trading. Hence I try to do it entirely mechanically.

Second-guessing my trading plan backfires – always

But far too often I second-guess my strategies. Unfortunately, all my second-guessing deteriorates my P/L. My decisions to overrun my strategies do not create any value whatsoever.

Why do I second guess (my quite good strategies)? Because it’s tough to detach from money when having a terrible day or a good day. On bad days I start hoping for the better, and on good days I’m afraid of giving away money. Completely irrational, and I know it. But still very hard to put emotions entirely on the sidelines.

Because I keep records, I can calculate quite precisely how much my second-guessing is costing me. Below is a chart showing my accumulated profits since October 2015:

Second-guessing in trading

The pink line shows the completely mechanical results, while the blue line is my actual trading. The difference is enormous, both relatively and money-wise.

So to refrain from more second-guessing, I have made a big poster on my wall showing all my five rules. Yes, five simple rules. Also, instead of sitting in front of the computer, I’m better off walking the dog, going to the pub, or chasing girls. The more I stare at the screen, the more stupid mistakes I make!

On a side note: My day trading has not been good over the last two years. One reason is that I’m being forced to trade less because of new non-display fees from NYSE (I only trade Nasdaq stocks now), and the second reason is that I’m focusing more on long-term positions. Long-term positions give me more peace of mind because it involves fewer decisions.


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