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Journals, Systems and Discretion

December 30, 2016


Once upon a time I didn’t use a trade journal. Record my results? Nonsense. My brokerage statements tell me everything I need to know, fool. The mountains of money I made (or lost) is on full display in my beloved account statement.

Then I got smart. I realized that the lessons hidden in my total profit/loss number were legion. How did I get there? Which strategies worked this year and which didn’t? Do any of my systems need tweaked or are they still as glorious as ever?

I asked said questions to the big, ever-present OVERALL P/L YTD that is always screaming at me from the bottom right of my Position Statement.

The response?

Crickets coupled with a smug look that says “I ain’t telling you nothing!”

So, I decided to keep better track of my systems using a journal. No doubt you’ve come across a few in your trading ventures thus far. The key is to find what works for you, simple as that. Let’s say one of my trading systems involves owning a few core ETF positions and selling monthly covered calls. To track my progress, I would have a dedicated spreadsheet to keep tabs on all the relevant trade details. Here’s an example with EEM, a popular emerging markets ETF. She’s shaded green for good luck.

Along with the usual metrics, the journal includes days to expiration (DTE) and the ongoing tally of my cost basis. By tracking my basis throughout the year, I’m able to identify the net effect of selling monthly covered calls versus simply buying and holding the underlying. I can’t think of a better exercise to internalize the covered call strategy than this.

Do you want to know how covered call selling is similar (and dissimilar) to renting out a house? Don’t buy a random stock or ETF and sell covered calls on it once. Instead, buy something you like; a security you’re comfortable holding through thick and thin. Then sell covered calls on it with sound management rules and do it every month next year. You’ll learn a ton.

Think energy stocks have bottomed and now’s as good a time as any to get some long exposure for the years to come? Grab some XOP, XLE, or OIH and sell calls till you kick the bucket.

Think rising rates and a friendly President are going to boost financial stocks for years to come? Grab XLF or KRE and sell calls till kingdom come.

Want to have some of your portfolio exposed to precious metals for decades to come? Grab some SLV and cash flow that puppy with covered calls. Keep a journal and come back to me one year from now with all you’ve learned about cost basis reduction, probability of profit elevation, delta hedging, and the host of other advantages that come when you’re engaged in cash flowing a passive asset.

Outperformance awaits in all but the most bullish of environments.

I don’t care if your system is covered calls or naked puts or credit spreads or condors or anything else under the sun. The key is that YOU know what the system is. You know the entry and exit rules along with management criteria. And keep a journal. Then at the end of the month/quarter/year, you can ask all the questions I mentioned earlier and find an answer.

Here’s another tip. Have a separate journal for each trading system and then have a catch-all one for any random trade you fall into. You know, the occasional trades that you jump into just because you can’t help yourself. The ones that you’re pretty sure you can make money with, but that don’t fit into any of your trading systems. Title the journal “Discretionary” and see if you make any money taking those types of trades. If you do, then build a consistent system around it.

If you don’t, then stop it. You now have proof that those random plays you’re jumping into don’t add value.

6 Replies to “Journals, Systems and Discretion”

  1. RichardBlanchard says:

    Great systems for clearing some of the smoke of trading battle and seeing how much real progress is being made. Thanks Tyler for all the great tips this year and good luck in 2017 !

  2. scrane001 says:

    Thank you…I like the idea of seperating out stratagies and having “Discretionary” as I love to experiment and place trades outside of my strategies…I just never recorded them


    Thanks Tyler. It makes more sense to have a separate journal for each system. Right now, mine is all in one and it gets a little crazy trying to make sense of what works and what doesn’t.

  4. STEWGILGIS says:

    Good ideas. I’ll use them.

  5. Adam Barr Adam Barr says:

    Thanks Tyler. Some great ideas that I will take into 2017.

  6. ScottMills ScottMills says:

    Another good article Tyler! Thank you

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