Trading is like any other skill and as such, needs to be improved over time.
But how do you actually improve your trading?
The easiest way…
By keeping a trading journal.
Today I’m going to explain what a trading journal is and show you how keeping one can drastically improve your trading.
What Is A Trading Journal?
A trading journal is just like type of journal you’d use to keep track of events or to record thoughts.
The only difference is that instead of recording thoughts or events that happen in your day-to-day life, you record information about all the different trades you make.
Having a record of all the trades you’ve made is important for a few reasons…
One of the biggest is that it helps you stay focused on the bigger picture.
Traders, especially newer ones, place far too much importance on whether a trade ends up being profitable or not.
Whilst it’s natural to care about making or losing money on a trade, you must remember that over the span of your career you’re going to place dozens, if not hundreds of different trades.
Having a journal that shows every trade you’ve placed makes it much easier to think of each trade as one of many, rather than treating each one as a life or death situation that has huge significance, which is what most people commonly do.
How To Create A Trading Journal
A trading journal can be created in multiple ways…
You can keep one on your computer via a spreadsheet or word document, you can use a online program, or you can do it the old fashioned way and simply write the information down in a book.
The key point to remember when it comes to making a journal is that the information you put in it is far more important than you way you create it.
The amount of information you record in the journal correlates to how much it will help improve your trading; the more information you keep, the easier and quicker it will be to improve.
A journal should contain two different types of information:
Basic info – stuff like what currency you bought, the price you bought it at, how much you bought, where you placed a stop loss order, the maximum amount you could have lost, how much you made/lost etc.
Advanced info – this should be stuff like what you did when holding a trade open; like did you sell before your strategy gave a signal because you thought the price was going to fall (even though it didn’t), or did you take profits too early because you saw some news was about to be released.
The basic info allows you to track your performance, letting you know how well you and your strategy is working as intended. The advanced info, on the other hand, helps you find and fix different mistakes you’re making (more on this in a minute).
In my opinion, the best way to keep track of basic trade information is through an excel spreadsheet.
Here’s an overview of the information it should contain.
Which pair you bought when your strategy gave a buy signal
– Buy Date
The date you bought the currency at.
– Buy Price
The price you bought at.
– Stop Loss Price
The price the stop loss was placed at immediately after entering.
– Amount Bought
The amount of currency purchased when your strategy gave a buy signal.
– Max Risk
Here you need to enter the maximum amount you could lose if the price falls and hits the stop loss.
To figure out what this is work out what the difference is between the buy price and stop price and then subtract that from the amount you bought.
– Sell Date
The date you sold.
– Sell Price
The price you sold at.
How much you made or lost on the trade.
– Reason For Entering
The reason you decided to buy – this will be determined by whatever strategy your using.
How A Journal Will Improve Your Trading (And Investing)
Having an account of all the times trades and investments you’ve made along with information like buy price, stop price, sell price, profit etc is great for tracking performance and seeing whether you need to change strategy, but when it comes to actually improving your trading and making more money that information isn’t very helpful.
What is helpful, however, is noting down the different thoughts and actions you had/made whilst holding a trade (or investment) open.
Most of the mistakes you can (and will) make trading and investing are not caused by a lack of technical knowledge or as a result of your trading strategy malfunctioning, they’re caused by you making emotional decisions – decisions that aren’t based on valid reasoning or logic but on thoughts and assumptions about the price.
Being caused by emotion makes these mistakes very difficult to pick up on, (some people don’t even understand they’re mistakes at all) but when you record your thoughts and actions in a journal they can be quickly identified and corrected.
To give an example, panic selling – where you sell just because the price fell even though you had no idea of how much it would fall by – is a common mistake that causes people to either miss out on a large amount of profit – if they sell when holding a profitable position open – or lose money and miss out on a profitable opportunity – when they sell as a result of a drop taking place before the price has risen above the price they bought at.
Due to the random nature of panic selling it can be tough to deduce how much of an effect it’s having on your trading, and like I said earlier, is seen by some people as not a mistake at all.
This is where a journal comes in.
If, after you close a trade or investment as result of panic selling you note down in a journal that you sold because you thought the price was going to keep falling – even though it didn’t – you can go back later on and figure out how much money it cost you.
If you see that it happens frequently and notice it’s caused you to miss out on a large amount of profit, you’ll be much more motivated to stop doing it, and as a result, will start making more money.
A trading journal may not be the most obvious way to improve your trading but it is one of the best when done correctly.
Remember, a journal will only ever be as useful as the information you put in it. The more detailed you make a journal the more information you’ll be able to extract from it, and the easier it will be to find ways to improve your trading.