A trading journal is one of the major elements that separates novice traders from professionals.
Trading journals are intended to track the performance and reasoning behind all trades. They can assist in the critical thinking and decision-making process by demanding a justification for every single trade someone makes.
In most cases, major trading firms require their analysts to keep a trade journal or notes outlining their reasoning and the technical setup into which they've entered.
Ultimately, trading journals are meant to help identify patterns in a trader's technique that result in losses by highlighting the errors in a trader's judgment. The end-goal is to create a process for doing so that is both transparent and free from bias, allowing for the kind of reflection that makes a great trader.
Going from good to great
The more you record and write things down, the easier it is to retain and interpret that piece of information with the ability to rule out inconsistencies in your learning.
The same can be said for keeping track your trades throughout the year with the strategy of improving your mindset – geared towards winning small profitable stakes and reducing personal errors.
Your mental state at the time is, therefore, one of the three major elements you should include in your journal. You'll want to outline what kind of emotional state you were in when you entered a trade. If you cannot consistently apply a ‘confident' stance on the trades you are making, then there must be some part of your strategy and technical setup you don't trust.
For example, let's say you entered into a long trade with 10 percent of the grubstake on Monday and wrote “uncertain/high-risk trade/cautiously bullish in the mentality section. By Friday, that trade is shaving off 30 percent of your trading account.
A look back at the trading journal will tell what went wrong. To start with, you invested 10 percent of your total funds in a high-risk trade.Seasoned traders test risky waters with small bets and often take hedges in order to minimize losses.
Simply put, your trading journal is like holding up a mirror and monitoring the irrational exuberance and absence of management rules.
Just ask yourself: “am I entering into the right trade feeling confident and does it favor my stringent self-applied ruleset?”
The more you begin to practice writing and recording, the more you will notice your mindset begins to change with it as you develop trust in your own trading style.
Tracking trade performance
This brings us to our second criteria every journal needs: trade performance.
This may seem a little obvious at first glance, as all trading journals should possess an entry/exit position, the position size, and date as well as profit/loss and any stop losses you applied.
However, oftentimes the technical reasoning behind the trade is neglected and this is one of the more crucial elements in trade performance.
Assuming your bias is checked and your rulesets help to separate your emotional state from doing anything drastic – such as going all-in for ‘Lambo gains' – then the reasoning behind your trades stand as an important justification on why you entered them in the first place.
If from a technical perspective, you spotted a falling wedge followed by a large uptick in growing bullish volume and you took a long trade feeling confident, then that would help to streamline your critical thinking and again highlight areas where you are stronger while indicating other areas in your analysis that need improvement should you lose.
From a fundamentalist point of view, you may wish to note certain major news announcements or a company hiring a particular CEO with an excellent track record that would ultimately affect a company's bottom line.
What are the conditions?
This brings us to our third criteria all great trading journals should possess: market conditions.
The conditions outline exactly what the current state of a particular market was in at the time when you entered your trade.
This is important because ithelps you begin to highlight patterns in your trading style that are inconsistent with market condition.If you map out days in which you feel confident trading, then, by all means, note the market conditions down and give a rough outline of what was happening on that given day.
If you are trading more than 2-4 times a month on uncertain days, then perhaps it's best you leave that particular market alone or reassess your risk as the market continues its lower highs or sideways momentum.
Remember: the hardest battle lies within yourself. A trade journal is a valuable tool with which you can hold yourself to account for the errors you make, and it goes a long way toward weeding out the inconsistencies in your trading style.
As Brett Steenbarger, the author of “The Psychology of Trading: Tools and Techniques for Minding the Markets” put it:
“The journal is a business plan. The right plan, executed faithfully, can be the difference between success and failure in any endeavor.”
