Why a trading journal is important
"Dear Diary,
Today is my first day of writing about my trading journey. Hope all goes well!"
...Well this is not exactly what we mean by keeping a trading diary or journal,
but it kind of follows a similar concept!
Your trading journal is a log of all trading activities, and keeping one is
quite difficult and maybe time consuming, however, it will help you to monitor
both the performance of your trading system and your ability to execute it with
consistency.
Learning how to write one will not only benefit you but it will also discipline
you, whilst learning about yourself and the overall trading psychology.
Take it as your "report card" that you keep track
of your trades and actions in your trading account where you can "measure" your
strong points and review your weaknesses in your strategy and methodology in
order to make improvements.
You can be as
detailed as you want, and you can write anything you can think of that you find
related that made an impact on your trading decisions or results. Write down
what you're good at or what
you're not good at, any emotions you had while executing the trade, literally
anything and everything. But remember, you're not writing a novel nor an
encyclopaedia, this is something for personal and educational use that can't be
taught by a coach, a book, or a seminar. You must go through it yourself. Only
by gaining this experience you could potentially become an integrated trader.
Still, past performance or a previous successful strategy cannot guarantee
future performance and positive results; however, you can use this
journal as an opportunity to learn from your trading experience and understand
why you or the market went in favour or against your initial strategy. With
simple words... your learning curve towards better and efficient trading!
Let's take a look at 10+2 reasons on why
keeping a trading journal could benefit your trading!
1. Identify, Review, Learn and Work on
your weaknesses
Just because some strategies worked for you in the past, that does not mean
you should only apply those! At some point (we hope not though) all strategies
inevitably fail and must be replaced. As a result, it is important that you
still try to find new ones. Through recording all of the specifics of your
trades, you will be able to do an in-depth analysis of the trades you have
executed so far.
Go through all your trades and see where you went wrong, and try to consider
for your errors from now on and when the time comes to go over your trading
journal again, compare the results of the two periods to see if you've made any
progress. By consistently keeping a track of your trades, you will be able to
see where you might be falling short in order to work on them.
2. Helps you set up your Goals
Set targets that are slightly better than your previous ones to avoid
putting too much pressure on yourself while you are still learning. A journal
is a perfect way to determine what goals you want to accomplish, how you will
monitor your success, and what you will do to achieve your next targets.
3. It is used as a virtual portfolio
A trading journal can help you "build" a virtual portfolio. Usually this is
implemented by beginner traders where they set up a hypothetical amount of
funds to see if they can outperform the market (it's similar when one starts
trading with a demo account).
This can also be useful and used as a practice tool for traders who want to
expand into a new market and prefer to experiment before stepping into the real
trading world.
4. Ideal for monitoring potential growth
stocks
A trading journal can be useful if a trader is interested to invest in
growth stocks. Instead of buying the stock, the trader can record all the
details about the desired stock, including trends and the risks associated with
trading it.
Over time, you should have enough data and the knowledge to start trading stock
CFDs. However, keep in mind that investing in growth stocks usually requires a
fundamental rather than a technical approach to the stock market.
5. Holds you responsible and sensible
When you keep a trading log, you are less likely to make trades that are
not part of your trading strategy. Impulsive trading is what usually causes
most traders to lose money.
6. Helps you with risk management
A trading journal will help you identify areas where you might be making errors
in risk management. It's possible that you're not taking enough risk to make a
significant reward by setting the stop loss too close to the current price, or
that your position is too small to lead in any kind of real benefit.
7. Helps with trading psychology
Emotions have a critical role in trading. A trading journal will help you see
whether you ever get upset after a loss and start making trades or if you were
happy after a good earning! It will also help you see if you make rash
decisions after a string of good trades (and vice versa). Once you are aware of
them, you will be able to monitor them and will be less likely to make rash
decisions that will have a negative effect on your trades.
8. Brings consistency
When you are consistent with your trading journal, eventually your bad
habits will start to disappear and you will stop losing money as frequently as
before. This is due to the fact that you will be able to see the mistakes you
are making and you will strive to stop making them in the future. Therefore,
it's important to be as accurate as possible in your log to identify those
mistakes more easily.
9. Provides historical record and encourages
performance growth
The journal keeps track of all your trades over time. It will summarize all
of your trades and show you a brief status of your trading account. In other
words, it will become your personal archive, allowing you to look back and see
how often you traded, how good each trade was, which trades worked better for
you, and much more.
The more you study your trading journal, the more you will be able to adapt
your results for optimal trading and future performance growth.
10. Works as a
planning tool
A
useful trading journal should not only document your actual trade and trading
details, but it should also include information on your plans for each trade,
enabling you to "visualize" how much risk you will take, where your
profit goal will be set, and how you will handle the trade as it progresses.
To put it more simply is like a way to capture your thoughts in numbers and put
them into practice!
11. Methodology Verification
You'll be able to see how the system works in evolving market conditions and
will answer some of the questions you may have regarding your methodology (if
it works in a trending market and different time frames, the impact of any
trading decisions etc.).
12. Trading Journal as a Game Changer
Once you have "mastered" some of your trading techniques, you will gain
more confidence and you will be able to alter and differentiate your strategy,
thus your profitable trades will finally make sense and your "predicted" losses
can be avoided.
As seen from the above list, it is quite obvious that keeping a trading journal
has many advantages.
Although it may be difficult at first to keep track of every single trade you
make, it is noteworthy that keeping a trading journal is a smart strategy to
enhance your performance and gain confidence, while learning how to be
disciplined!
Forex trading success demands a lot of preparation and practice. Forex traders
must go through a variety of learning processes in order to be consistently
effective in trading. To that end, keeping a trading journal will not only help
you get there faster but will also improve you as a trader in the long run.
Sources:
- https://www.babypips.com/learn/forex/summary-keeping-a-trading-journal
- https://www.investopedia.com/articles/forex/11/why-you-need-a-forex-trading-journal.asp
- https://medium.com/@shandamatieshin/the-importance-of-keeping-a-trading-journal-b1408ec694fc
- https://traders-paradise.com/magazine/2020/04/the-importance-of-a-trading-journal/
- https://therobusttrader.com/10-benefits-of-using-trading-journals/
- https://www.finextra.com/blogposting/12877/everything-you-need-to-know-about-getting-a-trading-journal#:~:text=What%20is%20a%20trading%20journal,entering%20or%20exiting%20a%20trade.
