“Dear Diary…” – The Importance of a Well-Kept Day Trading Journal
Series: Mental Roadblocks of Day Trading
“Study the past if you would define the future.” - Confucius
Have you ever asked yourself, “What the heck was I thinking?” It is a very important question in trading. Every trader should take the time to look back, analyze the trades they made over the last week and piece together where there are needed improvements in strategy, reduced risk/reward and bad trading habits that need addressing. Your mistakes are your high-priced education. This kind of record keeping may seem tedious but its value makes the time put into it well worth it.
You should have a well-detailed trading journal, either on a notepad beside your keyboards or on the computer, for a few reasons:
1. It is an exercise in methodical discipline. Some of the best traders have been engineers or accountants rather than artists or salespeople. The habit and pattern of methodical and consistent actions is important in trading. If you have a hard time keeping a trading journal, you might also find you have a hard time being consistent with your trading.
2. It is vital to analyze your strengths and weaknesses. Your risk/reward ratio is a key component in making every trade. Unfortunately, it is not always easy to assess. But through your trading journal, you might note that your trades during certain hours of the day are less likely to be successful. Or perhaps a trading system you use consistently is not as successful as you thought. Armed with this new statistical data, you can evaluate top trading times (for you and the market), best working systems, and how much capital should be used at any given time.
3. It helps you trade unemotionally. There is no drier action than data input. Seeing your trades as a series of numbers in black and white can help separate your decisions from the action and emotion of trading.
4. It keeps your hands busy. Remember when we talked about the danger of overtrading just because the trading day gets a little uneventful? Logging in your trades is not only good record keeping; it is one of the most positive diversions from slow trading periods… unless you did end up taking up knitting as a hobby.
Important columns in your trading journal are:
Time of day
Entry Price
Target
Stop Loss
Reason for trade (ie system, trend, trigger, had a good feeling, etc)*
Exit price and time
Did I execute this trade correctly?/Trade Comments
*This is incredibly important for analysis later. This is where you measure the results of your systems. This is also the area where you should be honest enough to say, “just a gut feeling”
So, just as there is no study of the future without thoughtful study of the past, your trading future depends on an honest account of your successes and failures in black and white for study and improvement. Remember, your goal is to focus more on proper trading than on profitable trading. And that will be a lot easier if you use your trading journal. Note: In your trading journal, focus on the negative. This is where you have the most to learn and where your best lessons will be found.
