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 consists of writing down the results of all your trades in order to later assess your overall performance. Keeping such detailed chronicles also allows you to draw objective information when feeling upset and doubting your trading system after a series of trades gone wrong.
Most inexperienced traders downplay the significance of having such a journal, thinking they will have no problem memorizing their biggest mistakes, or successes. But keeping such a daybook is not just a reminder of failures, rather a way to keep extensive records on your trading practice and thus feed you with viable information when assessing how successful your trading system is and which are its flaws.
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Light in the tunnel
Trading logbooks appear to be handy, particularly after youve begun experiencing negative trading results, which lead to demoralization. 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 take a look at your previous trading sessions. For example, you could find a deviation from your initial trading strategy, which you havent 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 certain amount, although youve been sticking to your trading strategy. This could be due to the regular release of economic indicators, 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 result in saving you money. This is why you must write down as much sorted data as you can, including trade entries and exits. It is also useful to record your thoughts and visualize everything by capturing your trading session with screenshots on your platform.
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. This way an objective reasoning is ensured, which you can use at a later point, unbiased by a possible disappointment. Another positive side of keeping a daybook is that you can organize it as a spreadsheet that could show you the overall profit of single trades or a series of trades and produce an equity chart. Such a chart, showing a positive balance of your trading history, may be used to cheer you up and restore your confidence after a bad streak discourages you.
Writing down your thoughts before entering a trade will also make you think twice of your strategy. If you see you are entering the position for any other reason apart from following your strategy, you shouldnt execute the order.
This also includes avoiding the so-called revenge trading. It usually happens when an inexperienced trader has a long losing streak or an unexpected big loss, which upsets and forces him to enter a transaction immediately in an attempt to offset the losses. This usually has a spiraling effect and leads to further losses. While experienced traders with years of experience will most likely remain calm and unaffected by such an event, novice market players should deal with it by taking a break and clearing their mind, 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 or 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 before feeling 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, you should write down why you closed a position after exiting the trade and especially, if you have deviated from your initial plan. This gives you food for thought. The most common reason for people to steer away from their pre-planned strategy is the lack of discipline, which requires years of practice to build up.
Capture your screen
Screenshots, visualizing 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 certain trade went, but a screenshot will visualize exactly what you were seeing at that time without the pressure of being on the market. This allows you to further analyze your strategy.
Fourth and most important, you must always analyze the results of your trade and learn from your mistakes. After having written down your trades and captured the entry and exit points via screenshots, you need to take your time and scrutinize not only your mistakes, but also the good moves youve 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 use 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 dating way back will help you see a pattern of your most successful positions, which you can then use to focus on and earn even more money. Professional traders have a well established self-awareness and utilize their strengths, while attempting to minimize their weaknesses.