A trading journal is one of the most useful tools available for improving your trading. Yet, it is seriously under-utilized by novice traders. As a summary of your trading activity, a trading journal is powerful, as it can help you analyze your trades to help you make the required adjustments to be more successful.
Most brokers available today provide records and statistics of all your trading positions, whether you’re trading on OTC markets or on regulated stock exchanges. While this information is a good starting point, it’s not enough. There is other data you should add to your trading journal to have a better understanding of your trading process.
What should you include in your trading journal?
In addition to the basic information, like the asset you’re trading, the direction of the trade, the size of your position, the leverage, the time of your entry/exit position, and the stop-loss and take-profit protective orders, you should add statistics that can describe your performance, such as net profit/loss, largest win/loss, average win/loss, and max drawdown for instance.
Another important aspect of a trading journal is to write down the reasons why you opened/closed a position and if you did/didn’t follow your investment strategy, as well as money management rules. Think of the reasons why you did what you did during your trading session, and if they triggered a positive/negative result.
Write down if you were able to distance yourself from toxic emotions or if you let them take control, if you were in the right mindset when trading, and how you felt about the positions you opened/closed. You can add anything you think is necessary to help you better understand your trading process and improve it!
How can a trading journal help you improve results?
There are many ways a trading journal can help you become a better and more successful trader. By tracking your trading activity over a period of months, you will be able to identify patterns in your trading, whether they be good or bad.
A trading journal will, therefore, help you focus on what you can improve and show you what you did well, so then you can repeat it. Such a journal is also a great tool to stay accountable and honest with yourself.
Because trading psychology has a large influence on your performance, some components of your trading journal should be about emotions and trading psychology. By describing how you feel when opening/closing a trade, as well as when a position is opened, you will be able to spot when your decisions are emotionally driven, so then you can avoid letting emotional, psychological, as well as cognitive biases influence your trading decisions.
Another great reason to write a trading journal is to be able to monitor your progress towards your financial goals. As you should know by now, your financial and trading goals should not only be specific, realistic, and achievable, but also measurable and timely (the SMART method). That’s why a trading journal is a great tool to track your progress and see everything you’ve done to reach the level you’re at now.