A successful trading career entails having an edge with each trade taken. A trading journal is an effective tool that successful traders use to fine-tune entry and exit points, likewise improve trading performance and experience.
What is A Trading Journal?
A trading journal is simply a log that traders use to record all trades taken. The journal as a trading weapon allows traders to reflect upon previous trades as part of an internal evaluation process. It is thus a simple and effective tool for spotting weaknesses in a trading strategy. Likewise, it helps uncover where caution and improvement are highly needed.
A trading journal’s purpose is to provide an overview of everything done in a trading account. Therefore, it should include all the trades taken, as well as the market traded. It also provides entry and exit points and trade direction, position sizes, and trade results.
It is essential for a successful investing career to keep a trading journal, according to Brent Donnelly, the brains behind The Art of Currency Trading. As an essential trading tool, a trading journal helps track trading activities while capturing emotions, themes, and thoughts throughout the trading period.
Writing down everything from trades entered, time, and the reasoning behind in a journal makes it easy to pick up on recurring errors, themes, and leaks in a trading strategy.
How to Create A Trading Journal
A trading journal should be tailored to meet one’s specific trading goals and style. When it comes to preparing a trading journal, it is crucial to:
- Choose between trading journal on a book or a spreadsheet
- Identify information to be recorded
- Create a portal for recording all trades taken including stop loss and take profit points
- Reflect on the trading journal before opening a new trade
Professional traders prefer integrating a trading journal on a spreadsheet to leverage built-in analytical functions that such platforms have. When it comes to information to fill in the journal, currency pairs, size of trades, and executed trades, long or short, should never be missed.
Similarly, one can include conviction about a given trade and the strategy used to arrive at a given speculation. At the end of each trade, there should be a note indicating whether it was successful or not and the lessons learned.
In the trading journal, there should be a clear articulation of why a given trade was taken. The reason, in this case, could be due to technical or fundamental analysis. Similarly, after executing a trade, you should reflect on the information to see if the reason for the trade is bearing any fruits. Carrying out a detailed analysis after trading would help determine whether a given strategy is working or not and the kind of improvements needed.
The conviction part, on the other hand, should detail how one feels about a given trade. A high conviction would occur when a given trade, based on a technical pattern, aligns and pans out perfectly. If a trade is based on a news story that is not clear, then the conviction can be medium.
Everything in a trading journal should be recorded after a trade is placed. This way, you won’t have to remember why a given trade was taken. The same should also be done after placing a stop loss and take profit order,
Trading Journal Evaluation
Preparing a trading journal is the first step to perfecting and evaluating a trading strategy. What is done after data is accumulated over a given period is of utmost importance? Conversely, after a certain amount of time, take time to go through the journal’s data to get a feel of how effective a trading strategy is.
While evaluating a trading journal, it is vital to look out for mistakes made out repeatedly. It is also important to check whether you stuck to a set-out plan. In this case, a trader can see whether they take profit too soon or losses at worse levels.
Likewise, check out whether you are likely to lose money in a specific currency, which times of the day or days are good for trading based on results. It is also important to check whether high conviction trades lead to more profits or losses or lower conviction ends up generating more profits.
This type of analysis goes a long way in improving a trading strategy by identifying errors and mistakes in the trading game.
Why A Trading Journal
In a field where emotions influence a great deal the kind of decisions made, trading journals allow traders to stick to trading plans and strategies. By simply typing a trading Journal and going through it before placing a trade, it becomes much easier to avoid making trading decisions based on convictions or likings.
Bad discipline in trading often comes from not having a plan. Likewise, many people have lost their hard-earned money for not planning for entering and exiting trades. A trading journal is designed to alleviate such missteps by ensuring rule-based trading.
As an evaluation tool, a trading journal can go a long way in identifying any form of bias when it comes to trades taken or financial instruments traded. For instance, a trader can discover whether they are always long on the U.S dollar and short on commodity currencies.
Likewise, a trading journal can help identify which time frames are the best for basing trading decisions. With a trading journal, it also becomes easy to identify which time horizons are the best for trading or for placing a particular type of trade depending on the profits or losses incurred.
A Trading journal is a simple yet effective way of improving a trading plan. Trading without a trading journal amounts to trading without a plan. A trading journal allows one to filter out bad trades and trade based on set out guidelines and rules. Trading journals also provide insights into trading performance. Measurement of your trading leads to risk control and, ultimately to improvement.