Investors Guide to Conducting Post-Trade Analysis

Performing post-trade analysis is one of the most overlooked and under utilized steps by investors. Recapping trades to break down how they went right or wrong will help prevent future mistakes and improve returns down the road.

For those investors who do conduct recaps of their trades, one of the common mistakes often made is only doing post-analysis on losers. This is a mistake. Every trade has something to offer and winners can sometimes be even more educational than losers.

Who, What, When, Where, Why

When looking back at past trades, all the bases must be covered.

Who
You are responsible for your portfolio. If you find yourself saying, "this is that trade Joe told me to do...", then you are already off on the wrong foot. How can you be successful if you are not learning as you go?

What
These are the nitty gritty facts about the trade which includes:

When
This is the date you made the trade, any subsequent purchases, and thereafter any sales. For those day trading, this can get far more advanced by looking at hours, minutes, and seconds. A full-time day trader I know tracks his trade times so in depth that he knows, by the hour, which time of day he is most profitable. Talk about effective trading...

Where
Not as relevant as the other "W"s, but where was the trade made can also be important. Were you at home or mobile trading while out of town or on vacation? Track this data point and you may, for example, find that you have a habit of making poor trades while on vacation.

Why
This is your detailed trade overview of what you were thinking when you made the trade initially. The more detailed you are, the better. For example, "Gold broke out of a fresh x month base on heavy volume so I bought x shares of GLD on the breakout. The breakout came on heavy volume and..." If possible, also note your emotions. In the end, successful traders are emotionless, and if you sold too early because of nerves, then there is room for improvement.

Steps to a Proper Recap

To get the most out of your trade recaps, follow these steps which begin as soon as you are done with your trade:

  1. Update your excel sheet / trade journal with the final trade details. Your excel sheet should include everything listed above and ultimately spit out your end profit or loss alongside your % return. For those who do not have one or would like an update, feel free to download one of mine.
  2. Pull up a stock chart of the security and take a screenshot with the relevant time frame (day traders should use intraday charts, swing traders daily charts, etc. If you are a long term investor, then perhaps a daily and a weekly chart will be useful (I almost always grab both).
  3. Open up your chart in Microsoft paint and draw in any pertinent technical analysis with buy points. I put arrows and note exactly where I bought and sold alongside how much of my position (ie 25%, 50%, 100%) so I can visually see a timeline of how the trade played out.
  4. Using paint, type in your trade notes. Referring to the "Why" above, this is a great place to put this information. Some of my recaps will have several paragraphs of notes for example. You will not recall your exact thoughts a year from now, so it is important to write down as much as possible when the trade is still fresh.
  5. Reflect and tweak your trade rules. Knowing what you did right and wrong, you can now refer to your trade rules and see if or where you slacked off. This reflection will bring flaws in your style to light and you will be better prepared next time around. This is also a good opportunity to update, add, or remove any rules.
  6. Archive for later use. Once you have reviewed the trade start to finish and gone through the motions of a proper recap, save your excel sheet and move your stock chart screenshot with notes to your trade recaps folder on your computer.

Going through the above does take time, but it is well worth the patience. Like anything, making a habit out of doing it right the first time will save you the effort later on. And in the end, when it comes to your nest egg or personal portfolio, constant tweaking and the dedication to the long term is the key to profits.

Examples

To see how this comes together, below I have several of my actual recaps for you to take a look at from last year. You can see how sometimes simplicity is best while others I get more in depth to understand what was really behind my trade decisions. It is important to note though that this is just how I do it. Software is MarketSmith, see my 2011 recommended tools for details on how I use this service.

PLCE 10/22/10. Retail was on fire, and I had chosen the right group, just the wrong stock. Ultimately the stock failed as earnings dissapointed and the stock gapped to the downside.

VLTR 09/30/10. A quick in and out for a profit.

FFIV 09/30/10. What I like about this chart is I came back and re-did my analysis again much later, updating my original notes. This allowed me to see that I actually had a big winner on my hands, and my timing was just off.

Other Tips for Success

Having done quite a few recaps over the years, there are some little details that I have found to make a big difference. Perhaps some of these tips will be relevant to you:

  1. Date your screenshots properly by using Ticker then Date, ie "AAPL 010211". 010211 is the date, 01 (jan) 02 (2nd) 11 (2011). If you have two charts for one stock, either add their name to the end, ie "AAPL 010211 daily" or just another number: 1,2,3 etc. This makes for quick and easy navigation of your trade recaps.
  2. Add your benchmark index's return to your excel sheet to compare against each trade. Three out of four stocks follow the overall trend, so if you are trading by your rules and still losing, look at this metric and you may find that it is not you, but the market that is weighing down your portfolio and spurring losses.
  3. Weekends are a great time for recapping trades. Why? Because your mind is clear and typically we are much more relaxed on Saturday and Sunday (hopefully!). During the week can be hectic because of the market, a job, etc. and a clear mind can really help to put the pieces of the puzzle together. Wake up fresh on a Saturday or Sunday morning, head to your local Starbucks or coffee shop, grab a coffee, and relax.
  4. Buy an iPad and upload all your charts onto it. This is the ultimate. No matter if you are in the bathroom at home, lying in bed watching tv with your wife, or having trouble falling asleep, your iPad gives you instant access to your collection of lessons learned from previous trades.

Closing Thoughts

The purpose of this article is to open your mind to the possibilities of what a proper post-trade recap can do for your portfolio. The more in depth you are with your recaps, the more time they will take but the larger the reward when it comes to profits and investor education.

We all have caught our finger in a door once in our lives, and it is amazing how fast we learn from that mistake. Apply the same mentality to your portfolio and you will be far more successful because you are constantly tweaking your strategy to obtain maximum profits.