The trading of any financial instrument is a nonstop learning process with many peaks and valleys. In the words of Winston Churchill, "those who fail to learn from history are doomed to repeat it." In the field of active trading, information is a valuable commodity. A trader is well-advised to acknowledge those words and learn as much as possible from his or her trading history. That said, past performance is not indicative of future results.
One of the ways in which a trader can learn from past success and failure is through keeping a trading journal. A trading journal is a comprehensive record of data exclusively related to a trader's performance over a period of time. It can help the trader establish a quantifiable track record, while helping to identify areas of strength and weakness.
Components Of A Trading Journal
A trading journal has several important components, each contributing to a comprehensive view of operations. When kept in sequence, the trading journal captures important information during the pre-trade, trade-execution, and post-trade periods.
The pre-market portion of the trading journal is an evaluation of each day's session before it begins. This analysis should be completed ahead of the trading session's commencement.
Expectations of market behaviour, potential trade opportunities, identification of technical levels and money management parameters for the session should be recorded in the pre-market area of the journal entry. Although the marketplace often renders forethought useless after a short time, it is important to measure the predictive value of the trading approach on a daily basis.
A comprehensive trading log is the nuts-and-bolts portion of the trading journal. The log provides a detailed record of trade for the session. It's common for a trading platform to automatically record each trade taken, actively documenting all transactional data. The data includes entry time, entry price, exit time, exit price and realised gain or loss, all which is typically logged in spreadsheet form.
In addition to the transactional data, a comprehensive trading log must document the information surrounding each trade's execution. The answers to the following questions provide insight into an executed trade's characteristics:
- Was the trade executed in accordance with the trading approach? The answer to this question is of paramount importance to the legitimacy of a trade. Was the trade executed as directed by the trading methodology, or did the trader "go rogue"?
- How did the trade unfold? Optimisation of the trading approach may be possible based on a study of price action after entry.
- How much "slippage" was realised? The data on entry and exit have been automatically recorded, but the amount of slippage needs to be quantified. If unacceptable levels of slippage are present, then the trading approach is in need of modification.
- What was the emotional impact of the trade's result? The answer to this question identifies the trader's mentality moving forward. Tendencies can be established and accommodated, possibly eliminating periods of sustained drawdown.
Upon providing an answer to these questions, the trader should have a clear picture of exactly what transpired during each trade executed during the session. A detailed trading log is an invaluable research tool; areas of improvement can be identified through the examination of the reasons behind a trade's result and can be used to attempt to increase profitability.
One of the key elements of successful trading is the ability for the trader to have a short, yet descriptive, memory. While it is true that learning from past events is invaluable, "dwelling" on past negative experiences is a detriment to future performance. The post-market recap provides the trader with the ability to place the actions of the day in context, and it should provide answers to the following questions:
- Was pre-market due diligence completed at market open?
- Did the pre-market analysis prove relevant?
- Was the trading approach strictly adhered to?
- What mistakes were made? Are they recurring?
- What elements of trading need immediate improvement?
Perhaps the most important aspect of the post-market recap is that it provides a trader with emotional closure to the trading day. It is crucial to evaluate performance in increments and not let one poor trading session spill into future opportunity.
Functions Of A Trading Journal
A trading journal serves as a real-time record of market activity, trading methodology and trader performance. The trading journal is a valuable tool at the trader's disposal; however, its usefulness depends on how timely and completely the trader records pertinent data.
In the field of active trading, the ability to compile results from operations has an inherent value to individual traders and investors alike. A historical record of success and failure, or a "track record," is easily compiled through the keeping of an accurate trading journal.
Depending on the adopted trading methodology, a large number of trades may need to be recorded each day. For instance, the "scalping" trading method achieves profitability through taking a small profit repeatedly throughout the day. With the number of trading days in each year estimated at near 250, executing as few as five trades per day can add up to over 1,200 trades at year's end. If meticulously journaled, a statistically valid track record with a substantial sample size can be developed in relatively short period of time.
Identification Of Strengths And Weaknesses
A journal can provide an accurate illustration of the strengths and weaknesses of both the trader and the trading methodology. If long-term profitability is the goal, then consistent evaluation of employed trading principles is required.
Typically, the trader's brokerage firm will supply a profit-and-loss figure on a trade-by-trade basis. However, other relevant information surrounding the individual trade will likely remain a mystery. It is up to the trader to record and account for the factors that are directly impacting profitability. Descriptions of recurring mistakes and unforced errors committed by the trader are illustrated in the journal text while being ignored by the daily account balance numbers.
The following questions regarding trader performance can be answered through an in-depth review of the journal:
- Is the trading plan being followed?
- What happens to performance after a drawdown? After a gain?
- What is the emotional state of the trader after a loss? After a gain?
- Are the same mistakes being made repeatedly?
The marketplace is a dynamic system. Over time, it's common for trading methods to be rendered obsolete and lose their effectiveness. A trading journal can provide the trader with a real-time review of performance, evaluation of the trading approach and highlight areas in need of improvement.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation of Technical Analysts. He is a full member of the Society of Technical Analysts in the United Kingdom and combined with his over 20 years of financial markets experience provides resources of a high standard and quality. Russell analyses the financial markets from both a fundamental and technical view and emphasises prudent risk management and good reward-to-risk ratios when trading.
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