Memories or a journal? The choice is obvious! 05-03-2018
I recently took up a position in RCom. The stock had a nice recovery from the lows and after that brisk advance, it was undergoing a pullback. The intraday, daily and weekly charts were getting into some alignment and I figured I couldn’t lose. I saw on the chart that there was a bit of room to the downside that may be possible but since I was convinced that I was on the right track, I took the trade anyway. Two days after going long, the stock was down almost 2 points- which is a lot of money on the Futures!
Since the trade was just two days old, I could clearly remember the technical arguments I had used for buying. I can also remember overlooking the possibility of a decline, preferring to think that it might not occur. However, the market seems to have exercised precisely that possibility and pushed the stock price down by 2 points.
Now, I am sitting on a loss because the trade is not yet negatived and my stops are not yet hit. I tried to recall my last trade in RCom. This was some time ago and I had difficulty in remembering the date or the set up that created the last buy signal (it was a buy trade, that I do recall). So I opened up my Trading Journal that I keep by my table and looked up earlier entries. And there it was, with details of the intraday, daily and weekly set ups looking similarly positive. Excited, I read further entries on RCom only to find that the setup had not worked out but I had made the cardinal mistake of believing my analysis to be true and adding some more position on the dip. After a couple of more entries, I came across this one that said, It is beginning to become obvious that this RCom trade is not going to work out. I am trying to look for validations of the earlier buy signal but still not able to find one. The trend in the 30 minute charts just keeps getting worse. It is time to pull the plug. And a day later, I did, after losing a decent sum of money.
Here I am now, doing this same thing again. I am trying to justify the trade in some way or the other and holding on. The focus now has shifted from earning on the trade to hoping for an even exit! My mind is effectively blocking thoughts about the reasons for entry. It is, instead, seeking out some other RCom trades that ended in a profit!
Daniel Gilbert wrote about the dangers of relying on memory in Stumbling on Happiness: We try to repeat those experiences that we remember with pleasure and pride, and we try to avoid repeating those that we remember with embarrassment and regret. The trouble is that we often don’t remember them correctly. Remembering an experience feels a lot like opening a drawer and retrieving a story that was filed away on the day it was written, but…that feeling is one of our brain’s most sophisticated illusions. Memory is not a dutiful scribe that keeps a complete transcript of our experiences, but a sophisticated editor that clips and saves key elements of and experience and then uses these elements to rewrite the story each time we ask to reread it.
I cut the position on the following day without further thought. What I wrote in the Journal is the true recollection of what I was thinking and doing at the time I was doing it. Today what I recollect are just various vignettes and most of it is illusory as my mind seeks to protect me from the pain of admitting to being wrong in my analysis. The way we remember things is often very different from the way things happened. Overcoming this illusion of the mind requires us to shine light on this blind spot and the best way to guard against it is to write things down. Whether you’re new to investing or are two decades in, keeping a physical record can be a good way to prevent being fooled by your future self.
When we cannot recall our own follies, it is easy to get into a blame game (that is, anybody but me is guilty), or get into procrastination mode (not taking corrective action) or get into justification thinking (new analysis to justify holding on) etc. This creates more damage than anything else I know.
A Trading Journal is one of the most useful items you will ever write. It can really save you from disaster many times. It will help build better habits and eventually, make you a better trader. If someone is interested in the Trading Journal that I have designed for myself, get in touch with my office for a copy.