Why are trading journals important in Forex?
This lesson will cover the following
- What is a trading journal
- Why traders use journals
- How to keep a trading logbook
A trading journal is a complete record of all your trading activity over time. It involves writing down the results of all your trades so that you can later assess your overall performance. Keeping such detailed records also allows you to obtain objective information when you feel upset and begin doubting your trading system after a series of trades has gone wrong.
Most inexperienced traders downplay the significance of keeping such a journal, thinking they will have no problem memorising their biggest mistakes or successes. But keeping a daybook is not just a reminder of failures; rather, it is a way to maintain extensive records of your trading practice and thus supply you with viable information when assessing how successful your trading system is and what its flaws are.
Light at the end of the tunnel
Trading logbooks can prove invaluable, particularly after you’ve begun experiencing negative trading results, which can lead to demoralisation. Sometimes you might not be able to find a clear reason for the poor results, which is when you need to refer to your journal.
Answering questions such as “Is my trading system still working?” or “Should I continue trading the same way despite my recent losses?” would be a lot easier if you could review your previous trading sessions. For example, you might uncover a deviation from your initial trading strategy that you hadn’t even noticed before.
Having a comprehensive log of data will also allow you to identify certain time intervals during which your average profits are off by a given amount, even though you’ve been sticking to your trading strategy. This could be due to the regular release of economic indicators, the seasonality of certain events, etc.
The main goal of keeping a detailed trading journal is to prevent you from taking impulsive actions, which will ultimately save you money. This is why you must write down as much organised data as you can, including trade entries and exits. It is also useful to record your thoughts and visualise everything by capturing your trading session with screenshots on your platform.
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Steps to follow
There are several steps you must follow when keeping a journal. First of all, you must write down why you are entering a position before actually committing yourself to it. In this way, objective reasoning is ensured, which you can use later, untainted by possible disappointment. Another benefit of keeping a daybook is that you can organise it as a spreadsheet that shows you the overall profit of individual trades or a series of trades and produces an equity chart. Such a chart, displaying a positive balance for your trading history, may be used to cheer you up and restore your confidence after a discouraging losing streak.
Writing down your thoughts before entering a trade will also make you think twice about your strategy. If you see you are entering the position for any reason other than following your strategy, you shouldn’t execute the order.
This also includes avoiding the so-called revenge trading. It usually occurs when an inexperienced trader has a long losing streak or suffers an unexpected big loss, which upsets the trader and prompts an immediate transaction in an attempt to offset the losses. This generally has a spiralling effect and leads to further losses. While seasoned traders are likely to remain calm and unaffected by such an event, novice market players should deal with it by taking a break and clearing their minds, instead of risking more money without thinking straight.
Exit strategy matters just as much
Second, you should write down your exit strategy before entering the position as well. In other words, the whole process of conducting a trade, from the entry to the exit, must be planned and written down in the trading journal beforehand.
It is crucial to have a pre-planned exit strategy in order to avoid the feelings of doubt and greed that can arise during the trade. Humans are impulsive and irrational, and the best way to secure an unbiased exit point is to have it written down before you feel pressured. Of course, during the course of trading you can decide not to follow your initial plan, but by looking at what you have written down, you must ask yourself “why?” and seek a rational explanation.
Third, after closing a position you should write down why you did so, especially if you have deviated from your initial plan. This gives you food for thought. The most common reason for people to depart from their pre-planned strategy is a lack of discipline, which requires years of practice to build up.
Capture your screen
Screenshots that visualise trade entries and exits are also deemed very useful, as they provide an exact picture with a time stamp of how the market moved and where you were positioned. You might not remember how a particular trade unfolded, but a screenshot will show exactly what you were seeing at that time without the pressure of being on the market. This allows you to further analyse your strategy.
Fourth, and most importantly, you must always analyse the results of your trade and learn from your mistakes. After writing down your trades and capturing the entry and exit points via screenshots, you need to take your time and scrutinise not only your mistakes, but also the good moves you’ve made and what you could have done even better.
The best way to learn from errors is to have documented them in your personal trading journal, which you can consult even years later. Such information cannot be found in any book or seminar, as each situation is unique to you. These comprehensive records will highlight not only your weaknesses, but also your strengths and your most profitable trades. Having a log that dates back years will help you see patterns in your most successful positions, which you can then focus on to earn even more money. Professional traders have a well-established self-awareness and utilise their strengths while attempting to minimise their weaknesses.