Educational Articles

Trading Psychology

Making use of a Trading Journal

Typography

Operating in the financial markets will forever be a learning process.

Even for the most experienced traders, the above is still true. For that reason, memorizing the subtle nuances of each trade is of the utmost importance, as this is how we recognize mistakes and ultimately mature as traders. How we do this is simple: keep a trading journal.

Keeping a trading journal is, if you think about it, akin to an athlete reviewing previous competitions. Too often, small, yet crucial, details are missed when trying to recall from memory. Therefore, recording your trades in a systematic fashion may reveal strategies or tendencies that can lead to improvements.

The workings of a trading journal

Unfortunately, there is no 'one size fits all' here. Some prefer to journal their trades by simply jotting a few important notes down; others, however, take it much, much further.

While there's absolutely nothing wrong with a minimalist approach here, we personally favour a more in depth profile which includes, but is certainly not limited to, the following:

  • Pre-trade analysis (supported with images).
  • Trade management analysis (supported with images).
  • Post-trade analysis with images (supported with images).

Pre-trade report:

This section should clearly detail your reasoning BEFORE you enter into a trade. In addition, instead of just blindly writing what the market conditions were at the time, why not consider adding a chart or two to complement this, as they do say, 'a picture is worth a thousand words.' This should not really be a big deal since the chart(s) should have already been marked up.

Also just as important in this section is to determine one's exit strategy. Will you trail the position, is the risk/reward ratio favourable, are there levels of significance nearby etc.? Basically, you want to try and avoid surprise and have a plan in place for every eventuality that the market may throw your way, which includes noting any scheduled news events.

Trade management:

It is here that you have the opportunity to note your emotional state during the course of a trade. It is also recommended to supplement this section with in-trade images, as even with notes it's sometimes difficult to picture the scenario from memory.

Was the trade executed in accordance with the pre-trade report? Over and over again, we hear about traders 'jumping the gun' and entering a trade before the entry level is in play. Generally, traders enter the market too soon for fear of missing a move. Not only does this distort the initial risk/reward ratio, but it's also bad practice. Recording timing, therefore, is important to track your patience.

Other than prematurely entering a trade, do you consider deviating from the initial plan once the trade is in motion, or ever think of adding additional risk or take profits before your designated target levels? The information gleaned from trades will help provide an accurate illustration of the strengths and weaknesses of both the trader and trader's methodology. Descriptions of errors and recurring mistakes highlight the areas you need to pay heed to.

The best trading gift you can give to yourself in this section (all three sections actually) is HONESTY.

Post-trade report:

Following trade completion, it's advisable to log the outcome, win or lose. Also, as with the two sections above, adding chart images of the completed trade is beneficial to create a before-and-after scenario.

Was the trading plan followed? If it was not, dig in and find out what the reason was for abandoning your trading rules. If you committed a recurring mistake, note what your thoughts were and how you can improve on the next trade.

In closing:

At the end of each trade, save and file it. Once that is completed you can review the notes at your convenience.

Why is it that so many traders do not bother with trading journals, and likewise so many do not reach consistency in this business? Is that a coincidence? We think not! Without the historical data taken from past trades, how can one expect to grow and improve? We would say it is nearly an impossible feat as our brains can only remember so much! Therefore, do yourself a big favour today and begin a trading journal today.

The above information is, of course, not the be-all and end-all. There are likely other things one can add to their journals that may prove beneficial. It's all down to personal preference.