Whether you’re a seasoned trader or you’re just starting out, one of the best things you can do to improve your performance is to keep a trading journal.
I know your knee-jerk reaction is probably this: “That sounds like a lot of busy work.” But trust me — keeping track of your trades and progress will help you evaluate your performance and plan your future trades. It will also alert you to any patterns (both good and bad) you’ve been making and help you protect yourself from recurring mistakes.
True, it might be “busy work” if you’re a super high-frequency day trader. But we have reasons why we wouldn’t recommend that anyway.
So let’s take a closer look at trading journals and how you can create one for yourself.
What Is a Trading Journal?
Simply put, a trading journal is a log in which you keep track of what trades you make, your reasons for making them and their outcomes. It can be as uncomplicated as writing everything down in a dollar-store binder, or it can involve using in-depth software.
Trading journals are particularly popular with traders who focus on complicated trades, such as those on the foreign exchange market (forex). But anyone who wants to play the stock or options markets can benefit.
Now, one of the biggest misconceptions about a trading journal is that you use it just to log which trades you made and whether or not you profited. That’s not the point.
The point of a trading journal is to help yourself become a better trader. It’s not about giving yourself a pat on the back when you do something right. It’s about learning from both your successes and your mistakes. It’s about analyzing what you’ve done so that you can perform better in the future.
What Do You Put in Your Trading Journal?
There are several great software solutions for keeping a journal, but let’s start you out the old-fashioned way, with some loose-leaf paper in a binder. I recommend using a binder because you can easily store other materials related to your trade (we’ll get to that in a minute).
Here’s what to write down for each trade:
- The date and time you entered the trade
- The name of the stock
- The ticker symbol for that stock
- How many shares you purchased and your reasoning for choosing that amount
- Whether this is a long or short position (if this is new to you, check out this article)
- Why you entered the trade (did you use any particular systems?)
- Where you placed any stops, if applicable
- The date and time you left the position
- Your reason for closing the trade
- The percentage gain or loss that you realized from the trade
- Any feelings that you had about the trade before initiating it and while it was open
- Your thoughts on closing the trade — in particular, what you would have done differently
Those last two items can be the hardest. After all, they sound a bit too touchy-feely for a lot of us. But you need to be completely honest with yourself so that you can properly analyze your trading patterns and control your emotions. What gut feelings did you have that led you to make the trade? What did you hope it would do? What were your worst fears regarding the outcome of the trade?
Other Things to Include in Your Trading Journal
There are other items you’ll want to include in your trading journal. Here’s where using a binder comes in handy.
Before and during your trades, print or cut out and save anything you may have come across that influenced your thinking in regard to this position. It can be a blog about this one particular stock… or it could be a newspaper article about an event that might affect an entire industry. Anything that you found during your research.
The idea is to save anything that influenced your trade so that you can analyze your own trading systems.
Using Your Trading Journal
Although the process of recording all of this information alone can be a helpful exercise, the real importance of keeping a trading journal comes in reviewing it.
Every week, sit down with a cup of coffee in a comfortable chair and review your journal. In particular, look for patterns. Which days of the week are stronger for you — if you’re panicking and selling out on Mondays and Fridays, you may be having troubles with liquidity. After all, those can be days when volume can be at its thinnest.
Other things to look for include:
- Do you have more success with short or long trades?
- Are you adjusting your trading system to low-priced stocks versus higher-priced ones?
- Are there certain times of the day during which you have more success?
- What types of alerts or reports are more likely to affect your trading action?
- What’s the most comfortable trade size for you?
Finding answers to these and other questions from analyzing your trading journal can help you create and implement a successful system.
Remember, use an analytical eye when reading your trading journal. And be brutally honest with yourself. By keeping a trading journal, you will likely find that you will become a more mindful investor.
Do you keep a trading journal? What has been your experience with this helpful tool?