Is there a quicker way to lose money while trading than ‘emotional investing’? Read more to learn how to hack emotions and be a better trader.
If we look up “how to be a successful trader?” on Google, a plethora of results will surface ranging from ‘use XYZ indicator’ to “multi-screen monitors are the way to go.” Uniquely enough, ignoring the majority of these hacks and tips can increase your trading profitability. However, there is one simple tip that can make you a better trader. A tip that runs on discipline, one that decouples emotions from money, one which truly reflects your trading performance: having a trading journal.
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What Is a Trading Journal?
Simply put, a trading journal is a record of your trades which also doubles down as a summary of your trading journey and performance.
Now, let’s not confuse it with a statement from your brokerage account as a journal’s utility stretches way beyond that. It includes fine details like why you opted for trade or opted out of one. From logic behind trades to pattern awareness, journals are a lethal weapon in a trader’s armory.
Maintaining a trading journal doesn’t always need a complex application or program. A trade journal can be a simple Excel or Google Sheets.
Now, let us know how a trader benefits from having a trading journal.
Benefits of Having a Trading Journal
Evaluate Your Weakness and Strengths
Once your money is in the market, there are no trial rounds or mock simulations for you to observe and judge how your trades fare in the market. Now, for a beginner, there is no real ‘testing the water’ setup. So, for starters, a trading journal is the best way for them to evaluate their trading performance and identify their strengths and weaknesses.
Simple evaluations about your trading performance can be made by unbiasedly observing your trading journal. Sample evaluations you can make are:
- “Did my swing trades fail more than my long positions?”
- “Are my shorting trades not worth the effort?”
- “Am I missing out on more money by HODLing rather than booking profits?”
Following up on the previous benefit, having a trading journal puts everything in black and white and more importantly, in numbers. This greatly helps traders to gauge their trading performance, rethink their strategies, and alter trade setups in the coming sessions.
In a sentence - measurable goals are achievable pursuits.
Recognize Behavioral Patterns
Traders can reflect on their trades and identify patterns that they might subconsciously be developing. Emotion or behavioral trading patterns, profitable or not, can be a deterrent if not recognized while trading. Why so?
This is because behavior-driven trading patterns rarely have upper limits and traders often get carried away. Therefore, leaning back on a trading journal and identifying patterns enable traders to have their strategies performance-driven rather than emotions or behavior.
Build Consistency in Strategies
This is a cumulative benefit of the previous two points. Once the trading performance is quantified and is decoupled from emotions, trades are purely driven by strategies that are backed by numbers. This makes it repeatable and with sufficient practice, it grows into consistency in trading.
Avoid Impulse Trading
Similar to the previous benefit, having a trading journal limits traders from going out of their way to make money in the market. This usually happens when a consistently profitable plan goes haywire out of the blue. This leads to trades being done in a knee-jerk manner. And this is generally an emotional and compensatory act for the one-off loss.
And before we know, the knee-jerk reaction does more harm than good, and the loss compounds. Simply put, impulse trading is playing with fire. Here, having a trading journal helps traders to take emotions out of the equation. Knee-jerk trades can easily be avoided as penning them down in a journal makes the trader more conscious and less likely to add an impulse trade in a book of profitable ones.
Key Elements to Include in A Trading Journal
Having understood the benefits of keeping a trading journal, let us now delve into what details need to be included.
A pretty straightforward mention i.e. the instrument you have traded. With crypto, you can also mention the platform on which the trade was conducted.
Example: Bought Bitcoin on the lightning network. Sold $MATIC on Binance CEX.
Date and Time
What position are you trying to hold in the trade? Short or long needs to be recorded. To be more precise, including a probable time frame for the trade is highly recommended.
This ensures you are detached from the trade and if you’re wrong at the end of the time frame, you reassess the trade and not necessarily HODL always.
Entry Price, Exit Price and Stop Loss
The price at which you are entering the trade is the entry price. And the price at which you exit that trade is the exit price.
The percentage of your ‘tradable amount’ going into a specific trade needs to be included in the trading journal to assess the risk being undertaken in one trade.
Example: If your tradable amount is $100 and you decide to swing trade on Bitcoin using 70$, it means you are risking 70% of your tradable amount on a single trade.
Profit or Loss
The result of the trade needs to be recorded in the trading journal. These can be summed as a total profit or loss for a specific time frame like a trading week or month.
Now, this includes the qualitative factors that were considered in the setting up of the trade. Fundamentals and external news of the traded instruments, trading tools used for that particular trade like support and resistance, and other commentaries can be added here.
When you reflect on this trade, you can realize the thought process behind it.
How to Create a Trading Journal?
Any sheet of paper or mobile application where you can fill in the above-mentioned details can be your trading journal. Now, for convenience, Google Spreadsheets or Excel are highly recommended. They are easily accessible and editable. Columns for each of the above details need to be added and there you go - your new trading journal is ready.
Also, to make the journal more efficient, you can take screenshots of the annotated trading charts and attach them to the respective trade on the sheet.
Moreover, calculations can be automated on Excel which saves you precious time while trading. Having a ‘Total’ cell for the cumulative total of trades, profits, and/or losses, percentages are a must. These can be automated to answer questions like:
- How does my daily or weekly performance look?
- Which is my best and worst trading instrument?
- Trades of which timeframe have performed the best for me.
A perfect ‘trading journal template’ is a myth. Trading journals are personal and every trader needs to explore the relevant metrics they need or not while setting up a trade. Based on this, a trading journal needs to be customized.
For starters, here is how your trading journal might look.
Tips for Keeping an Effective Trading Journal
Review The Trading Journal Regularly
It is not enough to merely have a trading journal and record your trades religiously. It is how you analyze it and learn from it — which makes the difference. Reviewing the journal regularly is a must for traders to identify their shortcomings and be better traders.
Now, the frequency at which you review is a key point. Reviewing it at the end of each trading session can make you focus on minor, at times, trivial points. This is not only a waste of your time but also a recipe for disaster as you’re more likely to change your strategy continuously as you’re reviewing frequently.
Very distanced reviews do not help either as there is an opportunity cost associated with every trade and the quicker you find your shortcomings in strategy, the better it is for you.
So, finding the right time interval to review your trading journal is important. The usual time frames of your majority trades can be a good place to start to find the right time.
Use Price Charts to Visualize Performance
As mentioned earlier, annotated screenshots of the trading charts can be added to the trading journal to make them more precise and performance-driven. Drawing reference from the quote — pictures tell you a thousand words — price charts are a great addition to the trading journal.
They also reduce the time taken in recording the journal after each trade. A snapshot of the trading chart and a snapshot of the trade is usually more than enough for traders to make sense of. They also help in avoiding potential human errors while recording trades under tension.
Visualization of performance is a better way to understand your trading psychology and how you set your trades up. They are also a great source to lean back on while setting up similar trades in the future.
Jot Down Key Takeaways After Each Trade
Apart from the factual content that enters the trading journal, there is other information that can enhance the journal's utility. You can jot down how you felt while entering the trade and what influenced you into doing it. If you delayed your exit, jot down why you did so.
If any external factors like a news headline on ‘inflation rates’ or a tweet by Elon Musk influenced you, write it down so that the next time a piece of similar news breaks out, you know how to respond. Knee-jerk reactions can be avoided easily.
A trading journal is a key weapon that can be wielded by traders to improve their performance in the market. It is a simple shortcut to remove bias and emotions from trades and let your trading journey be driven by performance and numbers.
Apart from maintaining one, analysis of a trading journal is equally, if not more, important. This allows you to reflect on your trades, identify weaknesses and areas to work upon, and on a whole, improve as a trader. Hope this helps you to become a better trader and enhance your efforts in the market.