Trading forex is not a career that takes off to the moon the minute you begin. It is usually a learning curve riddled with multiple lessons along the way. In this market, the best traders are those who learn from their mistakes. Keeping a journal is one way of recording each of the lessons you pick up. It also helps highlight your strengths and shortcomings, which gives you a chance to improve on them.
Definition of a trading journal
A trading journal is essentially a record of all your trading activities. It records your traded pairs, your entry positions, exits, reasons for trading, and any other relevant detail you wish to record. By keeping a detailed account of all your trades, you can analyze them later and review your performance. This way, you can monitor your progress and make corrections on any flaws you identify.
Why do you need one?
1. It helps you identify and resolve your trading flaws
A trading journal keeps a record of every step of each trade you make. This way, you can gauge the performance of the strategy you are employing. If the results are sub-par, you will tweak a few aspects of your strategy to mitigate your losses while recording these alterations. After a while, you will be able to identify what works for what pairs and what doesn’t. By comparing these results, you’ll be able to come up with an optimized trading strategy.
2. It helps you set realistic goals
A journal helps you gauge the profit potential of your trading strategy. In a way, it works like forward testing your strategy. This enables you to set realistic goals since you’ll have an idea of what it would take to achieve them.
3. A journal can be used as a virtual portfolio
Once you have analyzed the results of your strategy, you may plug in hypothetical figures under the same conditions to see how your strategy would work with those figures. This could be helpful if you’re looking to increase your equity or venture into new markets.
4. It helps reduce the effect of emotions on your trading decisions
Keeping a journal helps you remain objective about your trading decisions. This is because you have to justify the reasoning behind each of your trades. In the event you still make emotional decisions, your analysis will point out their lack of profitability. This will oblige you to stick to trade strategies that result in profits.
5. It helps improve your risk management
A trading journal can help you identify where your risk management techniques need improvement. It could highlight when you placed too tight a stop-loss that it was prematurely triggered. It could also help you identify where you needed to tighten your stop-loss, use a trailing stop-loss or even adjust your position sizes.
6. Helps improve your consistency
By keeping track of your activities for each trade, you will be able to point out instances where you deviated from your strategy. Additionally, you will be able to tell whether such deviations brought on positive or negative results. This way, you can develop a trading culture that’s been proven successful.
7. It encourages growth
By analyzing all your past trades, you can track the growth curve of your trading career. This will motivate you to find new avenues for growth and how to streamline your strategy for improved performance best.
8. It acts as a planning tool
A trading journal compels you to document all the details concerning a trade even before you execute it to completion. This keeps you in control of your trades, as opposed to being at the mercy of the market.
9. It helps verify your methodology
A good trading journal will help you gauge how well your strategy works in different conditions. You will be able to tell whether it is best suited for trending or ranging markets and what sessions and timeframes it best works for.
How to create a trading journal
As aforementioned, you may record your transactions in a book in the sense of a more traditional journal. You could also opt to use a spreadsheet on Excel or any other record-keeping software. From here, the next step is structuring your journal. There is no right or wrong way to structure your journal. You may choose as many data points of your trades as you wish to record. However, it would be wise to tabulate your data for easier analysis.
The data included in your journal may vary, but there are some key essentials that we recommend for every journal to contain. These include:
- The currency pair you’re trading
- The entry and exit levels and their corresponding dates
- The order type of your trades
- Your position size
- The outcome of each trade: whether positive or negative
- The extent of your profits and losses
- Your analysis techniques, whether fundamental, technical or a combination of both
- Your risk mitigation measures
- Your level of conviction about the trade
- Your emotions while trading
It is good practice to record the details of each trade immediately after placing the trade. This prevents you from having to remember important details, such as the reasoning behind your decision. You may also take screenshots of the market at the time of trading, as they will come in handy during future analyses. After you compile your data, you can review it after a period of your own choosing.
Conclusion
A trading journal is a record of all the details pertaining to your trade. It works as an efficient performance gauging tool. By evaluating your performance, you can optimize your strategy and make improvements where need be. Additionally, it can help you identify potential avenues for growth and help you analyze the suitability of your strategy in different market conditions. This way, you can identify new markets or currency pairs to venture into.
