A trading journal is the essential tool to help you become a consistently profitable trader. As we all know by now, trading is not just about strategies and technical analysis. It takes more than that to see good results in your trading.
By keeping a detailed records of your past performances, including your psychological state in each trade you execute, helps you find patterns in your behavior to improve. It makes sense, how could you improve something that you can’t measure?!
To improve your trading performance, you need data to analyze and identify patterns so that you can improve and grow as a profitable trader.
While the idea of keeping track of every single trade, decision, and outcome appears tedious, it could help achieving trading consistency and long-term profitability.
In this article I’ll explain the importance of having a trading journal and its benefits for your trading psychology. I will also attach a template for you to download and use. Feel free to adjust it to fit your trading style.
The Importance of Keeping a Trading Journal
A complete trading journal not only includes the complete trade details, such as entry and exit prices and the number of pips gained or lost, but it should also have a devoted section where you indicate the reasons behind your trading ideas.
This includes trading psychology details, such as your degree of confidence in taking the trade opportunity, your reaction to expected and unexpected market situations, your state of mind as the trades are executed.
By keeping track of these details, you can get better insight into how your emotions and attitude are influencing your trading performance.
In reviewing a trading journal, you are able to monitor the common mistakes you make and take the necessary actions to avoid them next time you trade the market.
For instance, if you find yourself placing tight stop losses, you can adjust your risk-to-reward ratio or use different tools such as ATR indicator to help you place your stops. If you notice that your trading performance during the New York session is more profitable than the Asian session, then you can limit your trading activity only during the New York session.
This increases your confidence in taking trades and keeping balance between your emotions and your trading performance.
Having a detailed trading journal will allow you to run some statistics to assess your trading performance, adding to the assurance that your plan can generate consistent profits.
With that type of confidence, you can rely on your trading system instead of doubting yourself and your system with every loss you take.
Components of a Complete Trading Journal
First, start by writing down your fundamental bias for taking the trade. You need to be short and concise in your statement.
This would allow you to have a clearer insight and would give you something to review later on. The trader has to write down the reasons why he took the trade, is it because of a shift in the market sentiment or a new piece of fundamental data that changes the course of action, etc…
Next, write the trade-specific details, such as the entry and exit prices, your stop loss levels, your lot size, your main time frame where you execute your trades, etc. You should also mention why you are watching those particular price levels, it will help you later on in your analysis.
In addition to that, your trading journal should also have a risk and money management section.
Beside from writing much you are risking per trade and what is the appropriate lot size for each position, you should include your strategies on how to increase your position size when winning and how to reduce your exposure when losing. The goal here is to stay focus and avoid panic when things go unexpectedly.
Lastly, it is also important to have a comment section where you write a short summary of your trading day. This part should indicate whether or not you were happy with your trade and the overall result of your trading day. Make sure you highlight the emotional part of your trading experience as they rise.
In fact, this might be one of the most important parts of your trading journal as you make the correlation between your emotional state and the market behavior and how you handled your trades.
Many traders prefer relying on the logs or transaction history from their forex broker, but this is different from keeping a trading journal. When you look at the transaction history in your trading platform, the only things that you can see are prices and the date of each trades. The missing part here is the reasons why you took these trades.
Here’s a free Trading Journal Template to download!