The first thing that often comes to mind when trading the financial markets is strategy. You will scan through tons and tons of strategies posted online and trying to pick one which will help you win and make millions in the market. Sadly, there is not such thing as a fool proof strategy. So what is the key in achieving success in trading? One of the most overlooked tool is your personal trading journal.
A trading journal consists of being able to determine your trading performance, review your analytical process, and keep track of your psychological reactions to profits and losses. Keeping a journal like this also allows you to analyze the success of each trade, which trades worked most of the time, the trading timeframe, and the time period for which the trade was held.
What Is a Trade Journal?
Basically, a trade journal is a very popular trading tool that consists of a written record of all trading activities kept by the trader. The trading journal generally includes information that would not normally be included in the account statement, such as the trader’s mindset, how the market conditions appeared to the trader when they pulled the trigger on a trade, as well as the general feelings the trader had when the trade was made.
The main focus of a trading journal is to keep accurate records of the trader’s trading activity, their adherence to a trading plan, and the trader’s own mental and psychological reactions to their trading activity. Nevertheless, an assessment of a trader’s journal amounts to very little if the trader has failed to keep accurate records.
Furthermore, examples of trade journals show how unique each trader’s records can be and what different traders observe about themselves when trading. Keeping a diary of trades can give a trader an insight that can only be learned from analyzing their own trades and noting their personal reactions after each trade is made.
Just by virtue of keeping a journal of their trading activities, a trader should gain a broader level of awareness about their trading behavior. This can prevent them from acting impulsively in future to the detriment of their account balance. In addition, obvious problems such as over trading or riding a profit into a loss become even more obvious when the trader is keeping a journal, which in turn make them easier for them to observe and correct.
Keeping a trading journal seems most effective when used in combination with the steadfast discipline needed for a trader to adhere to their preferred trading plan. By keeping a journal, the trader is regularly reminded of any lapses of discipline. As a result, they generally become better at keeping to their trading plan, and they also have access to a detailed record of each time when they diverged from disciplined behavior and what the consequences of doing that were.
Who Uses a Trading Journal?
A journal is kept by many successful traders that want to be objective about their trading. The more serious a person is about their trading, the more likely they will treat trading as a business and keep an accurate journal. All successful businesses keep meticulous records of their activity, trading is no different.
While most inexperienced traders underestimate the importance of keeping a journal, seasoned traders know the value of keeping an accurate record of not only trading activity, but the mindset and emotions involved when taking a profit or conversely, when taking a loss.
While all traders should keep a journal, to certain traders, keeping a journal might be a limiting factor, such as for very short-term traders. Day Traders and and scalpers might need to react and get in and out of trades in a very short time interval. This would make journaling each trade cumbersome and could potentially lose the trader money by missing a trade.
Nevertheless, for many other traders, keeping a journal gives them insights that they would not gain if they did not keep a journal. Not many people have a memory for their biggest mistakes or even for that matter, their biggest wins, which is the reason that keeping a journal is so important for a trader.
Key Elements of Trading Journals
Trading journals can come in as many variations as there are traders, but generally they will all contain certain information or elements that describe the characteristics of the trade.
They might also have an entry that lists the prevailing market conditions when the trader decided to make a particular transaction in the forex market.
The basic elements that most journals keep track of are:
- Time of the trade – this information lets the trader know in what session the trade was initiated. The information could also contain the market conditions and the reason the trade was made.
- Exchange rate of the trade – this shows at what level the trader initiated the trade. In addition to the exchange rate, this information could also include the target rate for exiting the trade, the amount of risk the trader is willing to take and the level for the stop order.
- Size of the trade – the trade size in relation to the rest of the account. This information is extremely important for money management.
- Results of the trade – Whether the results for the trade were achieved, and to what degree.
Several elements can make the journal much more effective. These include comments upon entering the trade and when liquidating the position. The level that you have decided to exit the trade and at which level your stop order has been placed, as well as the reason for picking that level.
Trading Journal Documentation
While some traders simply document the basic trading information when keeping a trade journal, other traders will write down everything that went through their head for each trade.
Each trader writes their journal in their own unique manner, but the trading journal is generally used as a tool to ensure that the trader is adhering to their trading plan and to provide helpful feedback to the trader about what worked for them and what did not.
In most cases, the way that a trader gets the most out of keeping a trade journal is by favoring self-analysis over numerical analysis. Focusing on personal considerations involved in trading more clearly illustrates when and why mistakes were made, and it can give indications on how to avoid making the same error on future trades.
Spreadsheets and screen captures of charts used for analysis are commonly utilized for trading journals. Nevertheless, some traders prefer to journal manually by writing everything down in a lined notebook. While this may seem somewhat backwards in today’s electronic age, some traders find that this way of journaling suits them best.
Analyzing Trading Results
Taking the time to analyze your trading journal will probably be one of the very best ways to attain improved success as a trader. Also, when you look at your trading actions with the benefit of hindsight, you will generally receive a much clearer and better picture of those things you can improve about your trading behavior.
Basically, once some time has passed, you will be cooler, calmer and in a much better position overall to look over your trading behavior analytically. You will also be better able to avoid interference from those pesky human emotions that can so wreak havoc with your trading success.
When analyzing trading results, you will want to see if you could you have timed your market entrances or exists better. You will want to assess whether or not you followed your trading plan in a disciplined manner. Also, if you can, perhaps see if you can find other signals on the charts or indicators that you can incorporate into your trade plan in future.
Once a trading journal has been used to compile a substantial set of trading results for your mechanical, automated or discretionary trading system, you will then want to start analyzing it to determine how you can improve your trading system or personal technique. You will especially want to take note of how many times you made trading errors and incorporate ways of avoiding them into your trading plan.
If you happen to be using a mechanical or automated trading system, then the other key form of analysis to perform is determining how well you kept to your established trading rules. Be sure to ask yourself if you ever deviated from your rules, and assess what doing so has cost you in terms of your overall performance, if anything.
Many traders suffer profitability issues even after developing a successful trading system on paper or after backtesting the strategy because they allow their emotions to creep into their live trading decisions. This can lead them to override the otherwise clear implications and signals of their tested trading system and adversely affect results.