In-depth Analysis

Why you should create a trading journal

For all traders wanting to improve their skills and knowledge of the financial markets and hold themselves responsible for both wins and losses, a well-kept trading journal is a critical tool, as it allows them to keep thorough records of all their trades. What is a trading journal exactly? Why should you create one? What should you include in your trading journal? Let’s have a deeper look into the concept of a trading journal.

Explain it like I’m 5

One of the best ways to self-evaluate and keep track of your performance as a trader is to keep a record of all of the ins and outs of your trades. 

Similar to a personal diary, a trading journal is solely dedicated to your trading activity, and could be in the form of a handwritten book, a spreadsheet, or an app, and should be referred back to on a semi-regular basis to assess areas of potential improvement.

By keeping a journal, you’re investing some of your valuable time and energy, so it’s important to know what you’re doing it for, and how to set it out properly for the best results.

Why should you use a trading journal?

Journaling is a method used by many professionals. Whether you’re a lawyer, journalist, chef, golf professional, or a trader, you’re trying to improve your rate of success and minimize your mistakes, and it makes sense to take notes during or straight after your work day to later reflect on what worked and what didn’t.

For one thing, you should use a trading journal because you’ll be able to quickly figure out your own patterns of thinking while trading and what you feel your strengths and your weaknesses are, all of which you can’t really see on your brokerage statement.

You’ll be able to process and learn from all of your experiences, as a well-organized journal doesn’t allow you to forget the steps you’ve taken in the past. This way you’ll be able to look at details over a set period of time, which helps you define your future strategy and improve your trading plan.

Your journal keeps you accountable to something, and if you’re keeping track of the thought processes and emotions behind your trades, you may be less likely to make irrational mistakes, knowing in the back of your mind that you’re going to have to write about it later. You’re going to have to be pretty honest with yourself, and you’ll be a far more disciplined trader as a result.

One thing to keep in mind before you start out is that while journaling is a very valuable exercise, you should figure out the best way of fitting it around your trading routine. In fast-paced scalping or day trading situations, for example, if you’re missing opportunities and getting distracted by the process of writing everything down, you’re quickly going to find it a nuisance! 

The same applies to the amount of detail you choose to go into. Add as much information as you possibly can, but not so much that it becomes a chore. Consistency is the key here, and you want to put yourself in the best position to create positive habits over time for greater results.

What should you include in your trading journal?

Because your trading journal is your own personal account of how you’ve performed in your trading day, there’s no right or wrong way to go about it. It’ll just need to make sense to you and be laid out in a way that suits your individuality.

Some people like to use a spreadsheet, some write by hand, and there are apps available. Some even choose to take a screenshot of the trading day and make detailed notes or drawings on it.

However you choose to keep track of your trades, there are a few simple points that will make it more effective to collect useful data for later. Here are just a few:

  • The date and time of your trade
  • What type of investment/asset
  • Was it a long or short position
  • The size of your trading position
  • Entry and exit points
  • Profit and Loss
  • Risk/reward ratio
  • Thought process and any emotional involvement
  • Any other notes you’ll use to refine your process

Remember that your broker will also provide information about your trading. ActivTrades, for instance, will give you the following data on your trade history report:

  • Total net profit
  • Gross Profit/Loss
  • Profit Factor
  • Expected Payoff
  • Recovery Factor
  • Sharpe Ratio
  • Balance Drawdown Absolute/Maximal/Relative
  • Total Trades
  • Short Trades (won %)
  • Long Trades (won %)
  • Profit/Loss Trades (% of total)
  • Largest profit/loss trade
  • Average profit/loss trade
  • Maximum consecutive wins/losses($)
  • Maximal consecutive profit/loss (count)
  • Average consecutive wins/losses

At the end of whatever time period you prefer, whether it be a week or a month, or maybe more, it’s time to go back and have a detailed review of your notes. Reflect on your wins and losses, net profit and loss, thinking process, and make any required alterations to your trading plan to improve your profitability.

There are many ways to review your journal, and the questions you should be asking yourself will vary depending on what you’ve chosen to document along the way. See some examples below, and think about what other information will be beneficial to you going forward.

  • What could you have done differently to avoid a loss or better capitalize on a gain?
  • What thought process went into holding onto a trade for too long, or not long enough?
  • How effective is your trading plan when closely followed?
  • Do you have a trading style that suits particular trading sessions?
  • Did you let your emotions cloud your judgment too often?
  • Do you have a higher success rate at any given time of day or day of the week?
  • Do you perform better in certain market conditions (bullish vs bearish vs range)?
  • How do you perform in high-stress situations where there is high volatility?
  • What helped you reduce your stress levels?

Now that you have your trading journal sorted, you’ll be more disciplined, and more thoughtful about how and what to adjust in your trading plan.f you’re just starting out, you’ll definitely feel a greater sense of professionalism, which will lead to more confidence and success in the long run. 

 

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.