Recording the buy and sell date, writing notes, capturing a screenshot of the stock chart, and using R multiples are several examples of the variables that make up successful post trade analysis. One other very important variable I want to elaborate on today is tagging, ie marking the strategy you used to make the trade.
What is Tagging?
Tagging is when you note in your trade log or excel sheet what strategy the trade utilized. By tagging each trade, you can assess performance over time and identify whether or not it is successful.
How Tagging Improves Your Results
1. Tagging forces you to think through each trade before you take it – When you consistently tag each new trade with a formal strategy, you have a clear grasp on what it is you are trying to accomplish. Often a certain setup might fall under several different strategies. By selecting one and sticking to it, you are increasing your odds of success.
2. Tagging helps to keep emotions at bay – Each trade tagged is one more data point you have on file. Had a monster trade? Great. But what if the 20 before that were all losers? By tagging each trade you can look at the bigger picture to identify if that big winner is a real sign of progress or a distraction from the truth.
3. Tagging allows you to more easily review, tweak, and revise strategies – With the StockTradingToGo Trade Log you can simply filter your trades by tag to view the biggest winners, losers, full history, and pull up a performance report (this can also be done in excel via formulas). By looking back every so often you can identify areas of improvement and tweak your trade rules for that strategy.
4. Tagging opens the door to testing theories and ideas – Tags are not hard to create or manage. Using tags creates an easy method for testing new strategies and ideas. Have you always thought of buying stocks that gap up 5% or more off earnings? Well with tags you can easily create a new strategy, take a few trades (with a smaller position size to start), and assess the results thereafter.
5. Tagging creates accountability – Trading is a mental game. By tagging each trade and assessing the results, you help to build healthy habits and force yourself to face the facts, good or bad.
Why Day Trading isn’t for Me
As an example of how tagging can be effective, I discovered after over a year and a half of day trading that in the vast majority of circumstances, it is a huge waste of time for me.
What I do is start each strategy as 1.0, then update the tag each time I make new rule adjustments so I can see how I improve over time. For example, in this case I started with “DayTrading 1.0”, then updated it to “DayTrading 2.0”, and so on and so forth. Ideally you want to place several dozen trades at least before revising a strategy to ensure it isn’t something random throwing off results.
For my day trading strategy, I made 444 trades in total and had a net return of +$4,662.56. I risked on average $93.38 per trade (the spread between my buy point and my stop price). I had eight total iterations of the strategy over the course of eighteen months. (Note – eight iterations is a big investment of time and energy and is not usual. In my case, I was very determined to find a winning formula.)
At first glance, $4,662.56 doesn’t sound so bad. However, one key metric was being left out of the equation. Commissions.
With commissions factored in, my net return was a whopping +$86.37. I had roughly $25,000 allocated to the strategy, so clearly I under performed the overall market averages.
But that’s ok.
Without tagging my trades, I never would have been able to determine day trading wasn’t right for me. And, even better, thanks to the tagging and strategy honing, I was able to learn A LOT about myself as a trader. Day Trading sprouted numerous other strategies that I am working on now. Last but not least, I didn’t lose any money, only time. In life and especially in the market, you can’t be free education.
Tips for Success
To wrap up this post, I want to leave you with a few tips for successful tagging that I’ve learned along the way:
- Have clear rules for each tag / strategy – I use Evernote alongside my Trade Log to journal all my market thoughts, ideas, research, etc. This allows me to identify each tag with clear rules so I can be consistent with my trades. Consider having preset profit targets, objectives, position management rules, and then misc rules for each tag.
- Use numerical identifiers – Start your seed strategy with “1.0” and refresh the tag each time you adjust your rules. You can progress to “1.1” or “2.0”, etc. You’ll be amazed when you compare the trades and performance of each iteration.
- Challenge yourself to improve across the board – Don’t just analyze the net return of each tag, look also at mistake %, time committed overall, trade frequency, and your overall emotions to assess true success. For example, day trading requires for more trades, time, and stress than buying and holding long. Van Tharp is a big advocate of finding the right strategy FOR YOU. Tagging will help you do that.
One other use of tags that some may propose is to tag the trade theme, ie “earnings”, “gapper”, “short”, etc. This can work; however, I’ve found that tagging the actual strategy is more effective. If you have a strategy for earnings specifically, then set up rules and tag those trades with “earnings 1.0” for clean results tracking.
Hopefully this guide inspires you to start tagging your trades, or for those already doing so, encourages more detailed trade logging. Trading is a life long game that not many win. By learning discipline and building healthy habits though, success can be achieved.