Keeping a Trading Journal

One common trait among successful traders is the use of a Trading Journal. Many think a Trading Journal is nothing more than a log of transactions but an effective Trading Journal can help one evaluate and educate themselves on trading. A Trading Journal can help you determine your strengths, weaknesses and biases by providing daily input on your trading. One great thing (or bad, depends on your trading) about trading is that it provides you with an instant reading on how well/bad you are doing, so you are getting constant feedback. In this article, we will address what to put in your Trading Journal and what the information means to you. Again, successful trading is hard to do (otherwise everyone would be doing it) and anything you can do to help your trading is at least something you should look into.

Some common things you should have in your Trading Journal include all factual information on the trade: date of the transaction, the security you traded, how many shares/contracts bought/sold, entry and exit prices, net gain/loss, stops and targets. Most traders include commissions in their Trading Journal as a way to net gains/losses in their account. The Trading Journal will give you a way to answer the most important question in trading: Are you making or losing money? Nowadays, many brokers will provide some sort of online journal, which is also useful come tax time.

This basic information also provides traders with the ability to see their individual Profit Ratio and Success Ratio. Your Profit Ratio is the size of the average winning trades versus the size of the average losing trade. The Success Ratio is the number of winning trades versus the number of losing trades. Many traders use these ratios to plot their growth as traders. As your winning trades get bigger and bigger in conjunction with a increasing percentage of winners, your profits will definitely increase.

After this point, Trading Journals tend to differ from trader to trader. Your specific trading philosophy will help determine what is the relevant information for your Trading Journal. Someone who trades using the Commitment of Traders probably would have more use for information on the COT reports rather than triple tops or some other technical indicator in their journal. The point being to add information on the specific market conditions, in reference to your specific trading strategy which will provide the reasons to your trade. After some time, you will have a reference to see which trading conditions are the best for your particular strategy therefore helping to increase profits. In addition to recording your specific set-ups, it can be useful to include how the market conditions changed during the trade and what influence that had on the outcome. In the end, this part of your journal should provide you with solid reasons you would give someone else to take the same trade.

One thing to remember is that a Trading Journal is supposed to way for you to recode your trading and find any patterns that will help you improve your trading. In this manner, your Trading Journal should be personal. Therefore you should record any information you find relevant. Many traders will include information on how they feel about themselves, the markets or anything else they think is helpful.  Many times this can be cumbersome considering that the markets can change on a dime at any time. One thing some traders do is use a digital recorder, which is a fast and easy to put your thoughts on a trade down to review. Many traders think that they are disciplined traders only to find out different after reviewing their journal. This can also provide you with a way to see if you are executing your plan correctly. Think in terms that you are trading other people’s money, and what would they think of your reasons and execution of each trade. If you can’t defend your trade to someone else then you probably shouldn’t take it.

Make sure to try to identify any feelings of fear or greed in your journal. This will allow you to analyze your decision making process. With your journal, you give yourself the ability to review each and every trade in an emotion-free, calm manner. The basic idea here is to include any insight into your emotions during trading and how to overcome them. This will also show you if you are more affected by outside influences than you realize because these influences can make our decisions less than rational. Furthermore, if you don’t write it down, you will never how and what is making your trading good or bad. A journal provides you with the ability to identify your thoughts and emotions during trading and it is these factors that determine your trading more than anything else.

After compiling all this information, one thing you can do with your journal is to identify your best trades. Being able to see when you are at your best will give you more confidence when that same situation arises. And it is this quality that separates the really great traders from everyone else. You can keep your losses tight and make a living, but in the end it is the traders who capitalize at the right time and make big bets (and win) that separate the men from the boys.  Over time, you want to isolate what you are doing right when you win in order for them to become habits.

A Trading Journal will also provide you with a way to prepare yourself for the upcoming trading day. Although the journal will only include things that have happened in the past, the journal will give you a way to spot patterns in the market. There are certain truths in trading that only become apparent thru the use of statistical information. Information from how corn traders trade on Fridays to the fact that the market has gone down from 11 o’clock to 2 o’clock the past few weeks will only show itself to those who record it. Basically, your journal will give you an idea if there are set-ups that have been working lately and how to use them wisely. Many successful traders look at their journal in the morning to give them an idea of what to prepare for that day.

One of the most widely underused aspects of a Trading Journal is that it gives you a place to outline specific steps for improvement. All traders want to ‘make more money’ or ‘have fewer losers’ but unless you give yourself detailed ways to reach that goal, that usually does not happen.  Many traders will look at losing trades, then write out what they should have done differently and have it handy the next time that trade set-up happens.

One thing I would like to mention in closing is that trading is a lot like driving. What I mean by this is that when you drive or trade, things may look very similar but most often there is something different. Even roads you have driven down a thousand times are always at least a little different each time. From how many cars passed you, to the colors of those cars, to the weather, to what you ate all can have an influence and therefore change the outcome. So in trading, many times trades look exactly the same, but they aren’t. A Trading Journal can help you spot patterns in your trading and the market, which gives a higher likelihood of profitability.

By Henry King