Switched-on investors are always on the alert for new tools to improve trading performance. But, sometimes, an old trick of the trade turns out to be most useful tool of all.
One old trick worth its weight in gold is a rigorous record-keeping system. At first blush, comparing the benefits of good record-keeping versus a slick new computer-based formula that purports to extract extra value from a portfolio sounds like a race between a Model T Ford and a jet plane.
But I personally regard good record-keeping as a powerful investment aid. It helps me to monitor my trading successes or failures. Even better, it serves as a useful diagnostic tool to keep me out of trouble.
Surprisingly, many investors do not have a comparable monitoring programme in place.
An important element of my monitoring system is to value my entire portfolio at the end of each trading week. City firms call it "marking to market". It takes about 5-10 minutes each Friday evening to compute the current value of all open positions plus uncommitted cash.
I post this figure to a dedicated spreadsheet which gets updated every weekend. Other columns on the spreadsheet contain end-of-week readings for various indices ranging from the FTSE-100 to the FTSE-Fledging and Aim-All Shares index.
My spreadsheet automatically calculates the per cent change to the value of my portfolio from the previous week. Changes to various indices posted to the spreadsheet provide a useful context. I can easily spot if weekly portfolio swings are due to broad stock market changes or to my own unique contribution.
There is a secondary benefit to systematic record-keeping as well. I often spot clues about which market segments are hot or cold well before the business media get around to reporting it.
By way of example, prevailing wisdom is to avoid small cap shares because of a lack of investor interest. But my weekly analysis reveals that small cap shares have kept pace with their bigger brothers from the FTSE-100 in recent weeks.
I also periodically monitor my win rate, the percentage of trades that produce a profit. My personal target is to complete at least 67 per cent of my trades at a profit. A higher percentage is even better. On the other hand, slippage below this level is often a signal that a trading problem is developing. It might be that market conditions are changing or my decision-making processes need rejigging.
Win rates are a valuable diagnostic tool because they help me to look past profitable periods that are largely due to a few very profitable trades.
Other useful indicators need to be monitored less often. A good example is keeping tabs on the number of new positions recently opened. It is an important indicator for me because I have a tendency to overtrade. Experience teaches that too much trading invariably costs me money.
My rule of thumb is to treat more than five new positions per week in my short-term trading portfolio as a warning that I may be over-trading. (I have a different figure for my longer-term portfolio.) There are occasional trading spurts of course because of fast-moving markets. But if the number of newly opened positions remains high for several weeks, I treat it as a warning to reassess my procedures and judgements.
Readers must not blindly follow my five-trades-per-week rule of thumb. We all have unique trading patterns. Each trader must set his or her own personal warning level.
Here is a simple way to establish your own "over-trading level". Scan through your trading records for the last few years. Tally the number of positions you opened in any five consecutive trading day period. Stretch that figure out to several weeks or months if you trade less often. Focus upon more active periods and tally the number of trades ultimately closed at a profit. I suspect you will soon identify your own danger level.
My own over-trading problem is invariably linked to a steady flow of very profitable trades. Good judgement is affected. Rules get bent. I call it the "walk on water" syndrome, a serious medical condition for short-term traders and long-term investors alike.