What To Include In Your Trading Journal
When you begin to learn about forex trading, you will no doubt read many times over about the importance of keeping a trading journal. In fact, this advice is now given to new traders so often that your eyes might even glaze over and you park it somewhere in your mental ‘to do’ list, to be tackled when more important business has been dealt with.
After all, it is easy enough to keep track of your online trading activity on your broker’s platform, and you may assume that this is a good enough record of your progress. Keeping a separate journal on paper or a digital spreadsheet might seem like an unnecessary task that will eat into your valuable time.
However, there are several reasons why establishing your own separate journal can really benefit your trading and help you to step up to the next level far sooner than you would do otherwise. There’s a lot more to it than simply noting down a list of your trades and a brief comment on the outcome. Here’s what you need to know about keeping a trading journal.
What exactly is a trading journal for?
Don’t make the mistake of assuming that a trading journal is just a record of your trading activity. It should contain this information of course, but it should also be viewed as a planning tool and a resource that will help you to verify your trading strategy, and quickly identify its strengths and weaknesses.
Your journal will also become an important tool for helping you to get to grips with the psychology of trading. This might seem like a rather abstract concept, but in fact all successful traders are acutely aware of their emotional state while they are working. They know that succumbing to knee-jerk reactions is the road to ruin.
When you inevitably meet stumbling blocks along your forex journey, you can use your trading journal to help you work out what went wrong. This is a much more constructive way of dealing with failure than floundering into revenge trading, or ploughing on in the dark. As some wise guy once said: It’s not failing that matters, it’s what you do afterwards.
In other words, we all make mistakes and we all fail, but not all of us learn from those mistakes. By referring to your trading journal, you will be able to take a rational look at your performance and identify what missteps you may have taken. This mitigates against the risk of biassed thinking and helps you to see the best way forward.
What should your trading journal contain?
Obviously the journal should contain a chronological log of all the trades that you have made and the returns you make on each one. Exactly how you set this up is really up to your personal preference. Some people prefer to work with traditional pen and paper, while others prefer to work entirely on screen with a digital spreadsheet.
Whichever way you choose to record the information, you will probably want to set up four columns which log your trade number, your closing date, the currency pair that you traded, and your total profit or loss on the trade. This will give you raw performance statistics so that you can see your progress at a glance.
As you progress in your trading career, it is helpful to add in other performance indicators such as your monthly average return percentage, your annualised return, your net gain, and your overall success rate.
This might seem like straightforward information that you can view on your trading platform, but this is only one element of the journal. Your journal is an open-ended document that should also contain at least some of the following.
A watchlist of potential trading opportunities
Before you enter a trade, you need to have a valid reason for doing so based on market conditions and technical analysis. This process is much easier if you keep a watchlist of potential trading opportunities, rather than try to pluck them out of the ether every time.
Everyone’s watchlist will be different, depending on their individual trading strategy. At the basic level, it should have a system of comparing which currencies are performing strongly and those that are weaker, within the currency pairs that you work with. It should also record any significant movements in the markets that will affect the currency value.
The watchlist should be updated on a daily basis to record any changes. You may want to use a colour coded system, such as red for a trade which is no longer viable, amber for one which has neutral prospects, and green for a trade that has all your ducks in a row.
A retrospective of each trade
Reflecting on each trade helps you avoid the bear traps of falling prey to your emotions and repeating the same mistakes over again. Some psychologists believe that up to 90% of our behaviour is driven by our subconscious, so no matter how level headed we consider ourselves to be, some of our decisions are likely to be subjective rather than objective.
By writing down your thoughts and observations about what you did right and what you did wrong, you will be able to build up a record of your trading patterns that you can refer back to and help guide your future decisions.
For this to work properly you need to be precise about details, and brutally clear eyed and honest in your reflections. Don’t use it as a way to beat yourself up about your mistakes, but do record any wrong calls, such as exiting a trade too early, entering at the wrong time, or using the wrong position size.
If the trade went well, similarly write down your thoughts and observations about why and what you can take away from the success to apply to future trades. Every few months, you can review your records and identify any common patterns in your wins and losses and use these to tweak and improve your trading strategy.
If fundamental analysis makes up the core of your trading strategy, then it is useful to devote a section of your journal to day to day observations on market conditions. This will give you some historical perspective on future trades as well as clarify what you need to keep in mind that day.
Use of expectancy formulas
If you like to get to grips with the technical nitty gritty of trading, then you may want to use mathematical formulas to help you work out the probability of a trade being a winner or a loser, based on the strategy that you have been following.
There are different formulas you can use, such as the Kelly criterion, and they are all designed to help you trade in a more logical and calculated way and eliminate some of the guesswork. For them to be helpful to you, it’s necessary to have made at least 20 or 30 trades using a consistent strategy, so that you have a big enough data sample to work with.
Reflections on your motivation for trading
Forex trading takes commitment, time, patience, and a lot of hard work. At times you will probably question the logic of carrying on, especially after a run of bad trades. While it is important to keep your emotions separate from your trading decisions, there is no getting away from the fact that we are also putting our wealth and egos on the line when we trade.
For days when you might be questioning your reasons for trading, it is a good idea to write down your motivations for getting into the game in the first place. This can give you a new perspective on any problems that you are encountering, and help you to clarify what you are trying to achieve in the long term.
There is nothing wrong with wanting to make extra income, or build up a nest egg for the future. However, vague statements about getting richer are not really helpful. Try and set down some specific and measurable goals, such as achieving a 50% success rate on your trades within a specific time frame.
All this seems like a lot to work with, and you don’t need to include everything straight away. Think about which elements of the journal would benefit your trading philosophy and lifestyle the most, and work on setting these up first. A journal is naturally a work in progress, and it will evolve over time into one of the most valuable resources in your trading toolkit.
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