September 07, 2017
Keeping a trading journal is one of the most important things to do when it comes to long-term success in trading. It’s a way to measure and track your trading performance, and to help you spot what needs to be improved. Keeping a trading journal can also help you in becoming more disciplined, which is one of the key attributes of a successful forex trader.
A trading journal includes much more than just the entry and exit points of your trade. It’s a comprehensive overview of your trading psychology and also includes reasons of why you took a particular trade. This will help you to determine whether a similar trade in the future will have chances to become profitable. Now that you know the importance of keeping a trading journal, let’s see what needs to be incorporated into your journal entries.
- Market views and philosophy – the way you see and understand the markets need to be included in your trading journal. Why do you feel bearish or bullish today? Is it because of a particular news event or article you read in the morning? Did the market move in the direction that you expected?
- Market observations – You need to observe the market for a long time until you become familiar with its movement. The market tends to repeat some patterns from the past (technical analysis), and every pair can act different in different situations. Your trading journal should include your market observations for each trading day.
- Trading mistakes and missed opportunities – By noting your trading mistakes you have a much better chance to improve in the future. Closing trades too early, trading based on emotions, overtrading, wrong position sizes, and missed opportunities can have a big impact on your success as a trader. Try to find situations where you made those mistakes and improve them in the future.
- Performance statistics – any performance-related data that can be measured and expressed in number should be included in your trading journal. Information on entry and exit points, risk/reward ratio, risk per trade, stop-loss and take-profit level, profits and losses and others need to become a part of your journal entries.
Now, that might seem a lot. So here are the specific elements that you need to have in your trading journal:
Potential trading area
The potential trading area is the area where you aim to open your position. This area is determined by rules that you’ve written in your trading plan. For example, your plan may be that you trade breakouts of support and resistance levels, pivot points, or trendlines.
Whatever it is, it needs to be strictly described in your trading plan. The time when you see a potential trade setup, your potential trading area tells you where you want to open the trade, so that it has a high probability of success with a limited risk. The potential trading area is a price zone between the current price and your entry zone.
Now that you’ve found your potential trading zone, it’s time to look for an entry trigger. Remember, a potential trading zone doesn’t guarantee that your trade will be a winner. You need to watch out for confirmation signals to enter the market.
Those confirmation signals can be overbought/oversold indicator levels, or reversal and continuation candlestick patterns. For example, if your potential trading zone is an area where the price approaches a major resistance level, the entry trigger could be a doji or shooting star near the resistance for a short entry, or a long bullish candlestick that closes above the resistance level for a long entry.
The next element your trading journal needs to have is the size of your position. This is in big part influenced by the size of your trading account and the risk you’re taking, and needs to be strictly described in the risk management part of your trading plan. For example, if you decide to risk 2% of your trading account per trade, this will ultimately determine what your position size will be. If you multiply your stop-loss in pips with the dollar-value of a pip, you can easily find out what position size you should take so that you don’t risk more than 2% of your account.
Let’s say your trade setup shows a high-probability buy trade, and you want to take that trade with a 50-pip stop loss just below the recent support line. If your trading account is $10,000, and you don’t want to risk more than 2% on a single trade, this means that the maximum loss of that trade should not exceed $200. With a 50-pips stop loss, your position size should be around $4 per pip ($4*50= $200), or 0.4 lots.
Trade management rules
Trade management rules are also a very important element of your trading journal. They describe how you manage an open trade. It’s crucial that you know the rules before you open a trade! What are your stop-loss and take-profit levels, and what will you do if the trade goes against you? Will you use a trailing stop on a particular trade or not, and why? You need to know the answers to these questions before opening a trade. Opening a trade is easy, but the exit point and trade management when the trade is already open will determine if it will become a winner or loser. Always know how you’ll manage your trade ahead of time, and the entries in your trading journal will help you a lot to avoid mistakes you’ve made in the past.
Now that your trade is closed either with a profit or loss, you need to make a trade retrospective on what worked and what didn’t. This part of your trading journal is called “trade retrospective”. Think about all the points we mentioned above, and how your decisions impacted the outcome of the trade. Is your potential trading area not well defined? Maybe your entry trigger was perfect but the take-profit level was unrealistic, so the trade went against you and hit the stop-loss? Or was your position size too large, so you risked too much of your trading account? Don’t rush through these crucial questions. Trade retrospective is a process where you learn about both your mistakes and good decisions, which will help a lot in your trading.