Keep a Trading Journal

You can’t expect to get it all right from the start, so keeping a trading journal and reviewing it regularly is important to help you improve. It’s a good idea not to critique your trades too quickly, as you may still have the cloud of emotion, but you shouldn’t wait too long before review if you are to make regular progress.

Why you need a Trading Diary

Rarely can you find two traders who agree on any of the finer points of trading or analysis, and each day financial experts offer such different opinions about the markets that one has to wonder if they are all looking at the same thing.

However, there is one thing is for sure. Just about all successful professional traders agree that it is important to maintain a trading diary and analyze your trade performance. Your records may differ in their particulars from trader to trader, but they all serve the purpose to document the reasons, execution, and outcome of every trade you make, with the goal of correcting past mistakes and building upon prior successes.

Logging and analyzing your trades is one of the most useful tools you have at your disposal. It costs nothing and can save you considerable time and hardship.

What should you track?

A trading diary should document the reasons for entering a trade, where and why you entered and where and why you exited. You should also note any adjustments to the position you made along the way. Also record the result and whether you adhered to your trading plan. Without such a log, each trade you make can disappear quickly from you memory and take its valuable lessons with it.

You should also include such elements as the initial risk/reward ratio, (divide the expected profit by the initial risk determined by the stop-loss point). Post-trade statistics should include a summary of the average trade, average win and average loss. You should also have a field for entering any comments or observations about the trade. Together, these records provide an indication of how you expected a trade to progress and how it actually was carried out.

First of all (and perhaps most important) it will tell you whether you adhered to your trading plan. This is in my mind one of the biggest benefits of maintaining a trading diary. A trading plan is only as good as your ability to follow through on it and the success or failure of a trade can be thought of as a function of whether or not you efficiently executed it.

If you constantly change a trading plan, by not taking a particular entry or exit signal, not adhering to your stop loss, not taking profits where you had planned, trading a smaller or larger position than you should, then you will never know whether your fundamental trading strategy is working.

On the other hand, if you follow through on your plan, you can look at the results and determine whether the plan has flaws and then correct them.

For example, if you have lost money trading a certain day trading system that you have carried out faithfully for the past few months, then you can analyze the different aspects of the trades and find out what went wrong. If you had deviated from the plan you would have no way of knowing whether the plan itself was flawed.

So a trading diary provides a helpful reminder of tactical mistakes you tend to repeat. Unless you have a record of your past trades, you might have no idea on how this practice of changing your plan during each trade has impacted on your bottom line. Be realistic and be honest with yourself.

Certain information might not be critical to you for your success and it may be impractical for you to record some data. For example, extremely active day traders will be hard pressed to record every trade they make. The time of the trade may be irrelevant to longer-term traders and investors. As you record your trades, it will eventually become clearer what you are able to include in your diary and what information is most helpful.

Over time, these trading records will provide a great insight into the strengths and weaknesses of your trading approach and execution skills.

Tracking your trades in a diary also helps to foster discipline by requiring certain elements (stop loss is one of them) of the trade to be determined at the time of entry. You force yourself to have a good plan in place when you enter the market. However it is not enough to simply record the details of your trades, you must also review them regularly to be able to benefit from it. As you compile more and more information, you’ll be surprised by the number of things you learn about the markets, your trading habits, and your personality.

The market will provide beginners (and more advanced traders) with some tough lessons. Losses and mistakes are impossible to avoid, but hard lessons are of no value if you don’t learn anything from them. To make the most of your experience, keep a trading diary. It is of benefit to look for a good mentor to help you to keep on the path of learning.

The following are the items that you should include in your journal —

  • What you bought and sold
  • What time you did a trade, as some people are better at certain times
  • Why you did the trade, what was the thought process?
  • How strongly you felt about the trade – were you sure of it?
  • What was your profit goal?
  • What was your stop loss level?
  • How much you made or lost
  • How long the trade lasted

Armed with all this information, you can narrow down what types of trades work best for you, whether you are hanging on too long to a losing position, and all sorts of relevant facts which will allow you to get better at trading. Learn to trade is a process, and while you never stop learning keeping a journal will allow you to make continual improvements to your effort.

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