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Every trader aspires to learn the formula for success, and every great trader understands that there is no secret formula. Trading is all about having a strategy and knowing what tools you'll need to put it into action.
A trading journal is a valuable tool for improving your trading skills. It is, in essence, a written record of what occurred during a trade. It can be as comprehensive as you want it to be, and it can be stored online or on paper. What matters is that you personalize your journal entries to suit your trading style.
Trading journals have several advantages, including the opportunity to track and monitor your progress, evaluate which of your strategies are the most successful, and help you identify areas where you need to improve. Trading journals can also be used to get a feel for a new market before diving in.
Before we look at the 6 benefits of maintaining a trading journal, let's look at how to keep a good trading journal that will benefit you in the long run.
How to Keep a Trading Journal
A quality trading Journal will include details about every one of your trades. The goal of the trading journal is to assist you in identifying and correcting flaws in your trading methods. You want to include as much relevant information as possible while also not going into too much detail. Spending too much time journaling can make it more difficult for you to stick to it over the long term.
In your trading journal, you can include the following to keep it organized and simple:
- The name of the security
- Total investment/number of shares
- Describe the trading signals
- Describe the entry and exit signals
- What stop losses were used and the reasoning behind them
- What is your total gain or loss from the trade
It's essential that you also write down your emotions during each trade, specifically before, during, and after you placed the trade.
The Benefits of Using a Trading Journal?
One of the most important things to keep in mind about using a trading journal is consistency. Being consistent will give you enough data to review at a later stage. Here are the top benefits of using a trading journal:
1. Helps in Identifying Your Strengths and Weaknesses
Each trader has their own set of weaknesses and strengths, and keeping a record of your trades might help you identify yours. Keeping track of all your trades can lead to interesting discoveries.
Other instances of weaknesses or strengths include:
- Your best or worst hour
- Which symbol is the best or worst
- The optimal time frame, such as 5min, 1 hour, or 1 day, etc.
- The best duration, such as intraday or Multiday
Whatever improvements you make to your success rate will benefit you greatly in the long run.
2. You Can Set Up Incremental Goals
You can create goals for yourself and improve them if you log and measure some crucial components of your trade. Goals could include:
- improving your win rate
- lowering your average risk
- lowering your mistake percentage
- lowering your average loss
The objective is to set achievable goals. For instance, if you want your win percentage to be 80% but you now have a win percentage of 40%, this is a little bit unreasonable. However, if you keep a journal and know your win percentage, you may establish a goal that is both attainable and practical.
3. It Helps You Keep a Virtual Portfolio
Although various applications on the internet can assist you in creating a virtual portfolio, a trading journal can also be beneficial.
Beginner traders can start a trading journal with a fictitious amount of money to see whether they can beat the market. If you are successful in the market, it may be time to start using real money. Just keep in mind that when trading a virtual portfolio, you won't feel the same psychological strain that you would if you were trading live.
Experienced traders can also benefit from using a virtual trading journal.
Remember that if you're using your trading journal to manage a virtual portfolio, you'll need to account for brokerage fees to get accurate returns.
4. You Can Identify Patterns and Trends
Keeping notes helps determine which trading strategies are effective and which should get reconsidered. Keep track of the charts you're looking at, the patterns you're looking for, and how various events affect your trade.
With practice, you'll be able to spot the underlying mistakes that are costing you money. For example, you may discover that you exited a trade too soon, that your stop and limit orders were placed incorrectly, or that you were the victim of a false signal. You will not make the same mistakes if you write them down.
5. Determine the Viability of Each Setup
Most traders keep a trading journal to determine their best setup. Investing in a proper setup will significantly boost the value of your portfolio and your win rate.
You can quickly identify your optimal arrangement and have some statistics to back it up. Keep in mind that you'll need accurate statistics on the setups. If you don't handle the trade well and make many mistakes, a good setup can appear bad.
6. Helps With Emotional Trading
Several traders have mental barriers that prevent them from taking risks. Understand that you must take a substantial degree of risk to get meaningful profits.
Emotions have a significant role in your trading. A trading journal might help you figure out if your feelings are getting the best of you.
A trading journal, for example, can help you notice if you get upset after a loss and start making non-sensical trades to recoup your losses. A trading journal can also assist you in determining if you're making impulsive decisions after a string of profitable trades.
Maintaining a trading journal distinguishes professional traders from amateurs, where professionals recognize the value of keeping a trading journal. When you start keeping a trading journal, you can enjoy several benefits.
First and foremost, your entire perspective on trading will be altered. Furthermore, you will be able to progress from the first day. When your journal backs you up with statistics that prove your method works, you'll have confidence and trust in your strategy and skills.