A failed system
I lost $1,318, or roughly 29% of my account worth, in the first two years (2014 & 2015) I traded options. My foray into options trading was a fiasco and I was on the path to losing my whole account. I researched new trading schemes and plans, read everything I could get my hands on or find online. I was desperate to turn my trading around. Something had to drastically change in 2016 or else I was done.
In April of 2015, I stumbled upon the Trading Journal Spreadsheet (TJS). I wrote an extensive review on it that you can read here. Prior to owning the TJS, I entered data into a homemade Excel spreadsheet like a mindless zombie (I love zombie shows/movies by the way). Here’s a snap shot of one of those journals:
I focused solely on the movement of my profit/loss number. As the P/L continued to drop in fits and spurts, I knew something was wrong with my system but I had no real understanding of how to understand the data.
Once I began to put the TJS to use, I observed the power of capturing more than just entry/exit dates and prices. The TJS asked me to enter things like stop price and target price numbers. I had to answer questions like, “Was this a good or a bad trade? Why?” These plus a dozen or so other data points were required to get the full use out of the TJS, and you could guarantee I was going to get the full use of it after paying $150 for it!
All of this data entry was fantastic, but I still wasn’t sure how to put it to use. The Analysis Sheet in the TJS sliced my data up 13 different was, but where was I to go from there?
Time to put the ol’ brain to work
Without a clear method for understanding how to fix the problems in my trading system, I just began digging through the numbers to see what they told me. For a while I was like a kid lost in a shopping mall, wondering aimlessly looking at this and that with no clear direction. One number of particular interest was “Expectancy”. I covered it before in a post called How to Diagnose the Health of Your Trading Plan. Little did I know it at the time, but it was the key to unlocking a more powerful level of trading.
I realized I needed to put in a ton of work to 180 my trading into a profitable trading machine again. Most people will just spitball and try to adjust their trading on the fly. But that’s a formula for disaster. Sure, you may have some short-term success, but that’s not what you need. You need a trading system you can trust. You need to put the keyboard down, step away and start analyzing what’s going on with your trades.
It’s not necessarily fun, nor easy and is often tedious and frustrating but if you want 180 your trading you have to be willing to do the analysis to find the problem and develop a solution. Without a clear understanding of what’s going on with your trading system, you might as well withdraw the money from your trading account, grab a drink, light a cigar, set it all in a nice little pile and set it on fire because you’re gonna lose it all anyway.
What doing a 180 with your trading can do for you
After a few days of work (trust me you’ll need some breaks) I made some adjustments to my plan…ok, I threw it out and started over! But all that work allowed me to come away with $1,296 in profits for 2016. That meant I was $22 short from getting back to even in a single year worth of trading! Let me tell you, the feeling was amazing!
Putting in the effort to build out my trading journal and do the analysis on the data it presented paid off nicely. The process I developed allowed me to really understand my trading system, where the errors were and what adjustments needed to be made to get my account heading back in the right direction…up!
Over the next few posts, I’ll walk you through the process I put together to fix my trading system. I’ve boiled it down to just four steps that walk you through the process of collecting your data, processing it into a useable format to answer some key questions, analyzing the data and then turning it into an actionable plan.
This is going to be a great series and I can’t wait to share my system with you! If you have any questions along the way, don’t hesitate to leave a comment, email me at Nakedoptiontrader@gmail.com, or hit me up on Twitter @optionstudent.