The world of forex trading can be tempestuous, as market volatility can leave you soaring with success or reeling from a loss within moments. These sudden swings of emotion can catch out the unwary new trader and this can lead to some unwise decisions. One very effective way to help you manage the roller coaster of feelings is to keep a trading journal.
Here’s a look at how to use journaling as a tool to keep emotions in check, as well as to improve your overall trading performance.
Why it’s important to be emotionally aware when forex trading
The role of emotions in forex trading is often underestimated or even dismissed by new traders. After all, it is based on mathematical principles, charts, the business of buying and selling, and a clinical balance of probabilities…what does all this have to do with our inner feelings?
The answer can be just as complex as the forex markets themselves, but the basic truth is that when we are dealing with our personal gains or losses, powerful and even primitive emotions are going to be involved. Human beings have evolved to be naturally fearful of losses, and this fear can override the pleasure of a gain.
This is logical when you think about it, because our early ancestors had to literally fight for survival, and losing valuable assets such as food, shelter, tools, family members and so on could mean extreme hardship or even death. Meanwhile, the urge to accumulate assets was strong to protect against such adverse events.
Therefore, our brains are wired to be greedy for more, and also to find losses painful. When we are forex trading, these natural instincts can cause us to hold on to a position for too long in the hope of making a bigger profit, or to exit a position too early out of fear of incurring a loss. We need to be aware of these emotional triggers to avoid making poor decisions.
The psychology of trading
The psychology of financial trading is not a new concept; it has been studied in earnest since the 1970s, and numerous theories have been proposed. These are based around the idea that traders are not purely rational humans who make objective decisions the whole time but are subject to biassed patterns of thinking and impulsive actions that can weaken their trading performance.
It’s advisable to read widely about the psychology of forex trading to broaden your understanding of cognitive biases in relation to your decision making. This can help you to navigate the markets more effectively and make the best use of your instant forex funding.
The role of the trading journal
It’s often not enough just being aware of the importance of emotional regulation and unbiased thinking. It’s a bit like knowing that poor posture can lead to backache and all sorts of other health horrors: we probably sit up a bit straighter every now and then, but as soon our minds become absorbed in a task we revert back to our usual mode of sitting.
In the heat of a teeth-grindingly tense trade, it’s hard to think about abstract theories or step away from the flare of excitement, greed, frustration, anger, disappointment, anxiety and so on. This is where a trading journal can help to keep you on track and accountable to your decisions.
What is a trading journal?
A trading journal is primarily a way of making a detailed record of your trades, including basics such as the time, date and currency pairs, and the entry and exit point and outcome of each trade. Beyond this, it’s important to note down your reasons for making the trade, such as evidence from technical or fundamental analysis.
The journal is not only a tool to keep track of your trades, but also a useful reference point when you are reviewing your progress or refining your strategy. It can help you to identify patterns in your least and most successful trades, and understand where the weak points and strengths in your strategy are.
When you make your entries for each trade, get into the habit of not only recording the whys and wherefores, but also your emotional state before, during and after each trade. This not only provides you with a safe outlet for strong feelings, but also provides you with insight into your psyche.
How can a trading journal help to manage emotions?
Increasing self awareness
Documenting your emotions as well as your trades helps you to recognise triggers and patterns or behaviour that you might otherwise be unaware of. We all have blind spots, and even if you think you are in control, you might discover that certain situations prompt you into hasty actions.
For example, after making a losing trade do you rush in to try and compensate with a string of poorly thought out trades? This is known as revenge trading, and it can be a downward spiral because the trades are rarely based on objective research.
On the other hand, you might be prone to overconfidence when you make a good profit or have a string of winning trades. This can lead to the mistaken belief that you can cut corners, or an exaggerated view of your abilities as a trader.
You might be tempted to increase your position size and make more trades before you are truly ready, leading to a reversal of fortune and a series of painful losses. A trending news report or hot tip on social media could cause you to follow the herd rather than rely on your own judgement.
By writing down a few notes about your emotional state before and after each trade, you will be able to more easily identify and address these triggers.
Encouraging unbiased decision making
We are all subject to unconscious biases in our thought processes. Sometimes these can be useful, because they help us form mental shortcuts so that we don’t have to think through repeated actions each time; they become second nature to us, such as dressing or making a sandwich.
However, when it comes to more complex and nuanced matters, these mental biases can cloud our judgement. For example, we might look for the economic news that confirms our preconceptions, and subconsciously ignore the news that challenges them.
If we are determined to find a historic pattern that has positive indicators for a potential trade set up, we might rely on just one method of technical analysis that confirms this, rather than testing out others.
By keeping a record of our decision making process, we can look back at it with fresh eyes, or the benefit of hindsight and understand where we might be making less objective decisions.
It can also be a chance to review trades that were particularly stressful, frustrating or exciting in the cool light of day, and help you to become a more objective trader in the future, and less subject to your emotional state.
Keeping yourself accountable to your trading strategy
When we are feeling bruised from a loss or bad decision, it can be a natural tendency to bury the painful feeling or justify it to avoid owning up to an error of judgement. However, if you make yourself physically write down your mistake, it’s more likely that you will reflect honestly on the reasons for it, and this will influence future decisions for the better.
How to keep your trading journal
Your journal can be as simple as a notebook and pen, a spreadsheet, or a specifically designed software tool. However, to keep a track of your emotional state, a physical paper notepad can feel more personal, and you can access it quickly and easily whenever you need to.
It should include the basic details of each trade, such as the time and date, currency pair, entry and exit points, position size, and result. You should also note your reasons for entering and exiting the trade, such as technical analysis, geopolitical events, market sentiment and so on.
Write down your feelings about the trade in a separate section. Were you confident, excited, worried, or neutral, for example, before and during the trade. How did you feel when you knew the outcome; angry, triumphant, relieved, or pleased? Reflect on how you might have been influenced by these emotions, and if you would now do anything differently.
In conclusion, recording your emotional state in your trading journal can help you to become a more emotionally detached trader, leading to more confident and objective decisions. By regularly reviewing your entries, you can reflect on your progress and understand more clearly where you tend to stray off piste.
This will help you on your journey to becoming a psychologically resilient trader who is capable of making steady profits.