Keeping a trading journal is a good idea for traders, no matter how experienced one is. It helps keep track of the trader’s habits’ evolution, capturing emotions, themes, and thoughts throughout the whole process. The longer one trades, the more difficult it becomes to keep their progress in perspective. Noting down goals makes it easier for traders to remember what they want to accomplish.
Many people hold a misconception that maintaining a trading journal is only for novice traders. In reality, however, it serves as a useful tool for trade strategy planning and assessment.
A sample entry from an excel trading journal can contain the P&L if the trader hits his/her take profit and the loss if the trader hits his/her stop. It’s helpful to input factor buckets such as correlation, technical convergence, and trade motivation. It helps traders recognize which styles and factor buckets are working and discard those who are not.
Traders can identify bias if they maintain a trading journal. They can note the various trading principles and practices they employ daily in the journal. They can also examine the time horizons on which they trade, noting down specific time horizons in which they can profit. The more a trader writes down, the more he/she can go back to the notes and investigate the various trading hypotheses. This helps answer queries related to one’s trading habits.
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Why a Trading Journal Is a Vital Tool
One of the key reasons why a trader should maintain a trading journal is that it helps them stick to their original trading plan. For instance, if traders note down their preferred trading plan before they execute a trade, they are more likely to follow the plan and not deviate from it. Bad discipline in trading is often a result of not fixing a trading plan beforehand and just hitting the buy/sell keys based on random market stimuli. Thus, a plan which is written down in a journal has 100 times the value of a plan which one loosely formulates, without noting them down.
Benefits of Using Trading Journal
A trader’s mind can often be abstract or fuzzy and is subject to change. There’s much noise present inside, sometimes, with more than one voice talking. One the other hand, when one writes down their thoughts in a trading journal, they tend to become more intelligent, concrete, and solid. There have been past instances in which even experienced traders have struggled to stick to their original trading plan by not noting things down. Not maintaining a journal or trading notes often result in the traders hitting buy/sell buttons by just reacting to price action and headlines, not using any trading logic in their trades.
Traders who enter into specific trades or a trading session without a properly formulated, written trading plan almost always experience poor trading. Risk management tends to be better when a trader has a written plan for each and every trade or trading day. The process of writing down a trading plant makes the trading tighter and helps in filtering out bad trades before execution.
As one writes down trading ideas, they may realize that a particular idea is not concrete enough to deserve an allocation of risk capital and can subsequently scrap the idea.
Traders should record each and every information about the trades once they are closed. This makes it easier to build up enough qualitative and numerical data to go back to assessing one’s past performance. To avoid sample size issues, traders should collect at least a few months’ worths of data on trade before making a self-assessment.
Instead of making a statistical analysis of trading, traders should ask themselves more subjective questions such as the following:
Questions to Ask
- Are there any mistakes that the trader repeatedly makes during trading?
Traders who keep on making the same mistakes over and over again, generally fail in the long run.
- Does the trader stock to their own trading plan, or does he/she take profit too early?
Many Traders have a habit of stopping out at worse levels than they had originally planned.
- Does the trader lose money while trading a specific currency?
- Are there any specific periods in a day, days in a week, or specific times in a month where the trader performs better or worse?
- Do the trader’s high conviction trades end up being more profitable than their low conviction trades?
If yes, the trader should find out the reason why.
- Is the trader properly sizing the different trades?
There are many other questions traders can ask themselves besides the above questions. Analysis like these can really improve a trader’s performance, helping him/her to reduce errors. When making an honest assessment of their performance, traders should get creative when slicing and dicing the information. They should always keep an eye on what is working and what is not and perform more trading activities that have been proven to work.
One of the priorities of traders should be to work hard and analyze their trading performance. It improves their chances of long-term success and leads to greater self-understanding. For higher profits, traders should always think about their trading, strengths, weaknesses, and leaks.
Maintaining a trading journal can also serve as a source of motivation. It also stops speculators from strategy hopping as all the data one collects becomes useless when they suddenly switch strategies. It instead forces the traders to rely on their abilities and trust their own trading methodology. It is much easier to deal with losing streaks when you can go back to notes and confirm whether they’re following the right rules and principles.
Maintaining a trading journal gives traders the opportunity, to be honest with him/herself. Many traders make a mental plan about what they will trade. However, writing things down makes them more concrete. Writing down each trade and its thought process and a rationale can help traders pick up on recurring errors, leaks, and themes in their trading procedure.