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What is the Trading Journal?

tradingjournal

Why do traders keep the trading journals and what do they hope to achieve by doing so?

Trading journals exist at different levels. At the basic level the journal is a record or log of trades taken, the day and time of the trade, the entry and exit prices, long or short, size, stops and targets, number of points made, commissions and net profit/loss.

Using this info, a forex trader can evaluate two most important indicators. The profit ration is defined as the size of the average winning trade vs. the size of the average losing trade. The second indicator is the number of winning trades vs. the number of losing trades. The second parameter is called the success ratio. Traders who are meticulous and methodical in their records are rewarded for their efforts by the journal itself. Over time, it the journal will reveal vital pattern which will enable the trader to determine things that would be difficult to discover without the journal. The examples are the best day of the week or time of day to trade and whether better results are achieved by trading long or short etc.


That’s just the start. Ideally, the forex beginner should take a screen shot of every relevant chart when the trade is opened or closed.

A picture paints a thousand words and. The traders can looked back over their history of trades and analyze them. In many cases the traders would wonder what on earth possessed them to take the trade! And they won’t make this mistake again. It is always advisable to make a note of the specific trade set up employed, as well as the entry and exit triggers used to execute the trade.

Many journals employ a system for evaluating all the three variables, so that at the end of the week or month, the traders can see their strong and weak trades.

Many of the above variables are statistics recorded for you by your forex broker. Therefore, a journal which is beyond a log often has some notes about the traders state of mind, the markets and anything else pertinent to the trading situation. The traders must also note their reasons for taking each and every trade. In this context we are talking about the reasons that would be given to someone else for taking the trade. Just imagine that you trade other people’s money. What then would be justification you give them for executing the trade?

Note that recording the trade-reasons is often difficult in real timewhile you’re trying to focus on the markets. A solution is a digital voice recorder available now on every cell phone. You may think you’re disciplined and that you follow your plan. Listening to the records and reading your journals you could be surprised at just how wrong you can be. It can be a chastening and eye opening experience! A brilliantly conceived plan is poorly executed. That is often the story you read in your trading journal. Look at the comments such as “I entered long because . . . it looked like it was about to go up’, ‘it looked oversold’, ‘it couldn’t go down any more, it had to go up’, ‘it was time that it went up’, ‘I could feel it, I could sense that it was about to go up’.

Most retail traders complete their journals in the privacy of their own study or office at home. So why transfer all or part of this process to an online public forum? The main reason traders choose to do this is because they are experiencing difficulties with one or more aspects of their trading. Opening up their practice to public scrutiny helps them to be more focused and disciplined while, at the same time, it exposes them to ideas and suggestions from other traders. Whether you’re a complete newbie or an experienced trader, the journal process can literally transform the way you view the markets and the way you trade them. For newbie’s, a journal has the potential to fast track their learning curve dramatically. More experienced traders tend to have a specific issue that they are struggling to resolve, such as how to exit a profitable trade for the maximum possible gain. Either way, a journal is a good way of trying to get from where you are now to where you want to be.

Journal Objectives

It’s recommended that you write down several notes about exactly what it is that you hope to achieve providing a focus for your trading journal. To help bring this into focus, these are some specific issues that should be addressed early

Objectives

What would you like to achieve? Is trading to be your hobby, a part time job, a basis for your career as a professional trader?

Markets & Instruments

Which market will your trading and your journal focus on? How many currency pairs will you track etc.?

Style

Are you a scalper, in and out of the market in minutes? Or do you prefer a more relaxed approach? Broadly speaking, are you a day trader, swing trader or position trader?

Time frames

Which time frame are you using? Do not be limited by the conventions, terms and rules. For instance, if you are a swing trader, there’s nothing to say that you have to use daily and weekly charts alone. Have you considered using one minute charts to get a scalper’s entry with a tight stop that you can then run into a swing trade?

Reversals, Breakouts or Retracements?

Essentially, most trading strategies fall into one of three generic types: reversals, breakouts and retracements. Formulate whether you understand those concepts and say why you are better suited to trading one rather than another?

Trade Set Up

How about your set up? What do you personally understand by that? Is your et up a clearly defined set of variables that come together and indicate that a trade may be on the cards.

Remember that the set up needs to be simple. Especially if you are a day trader, since you need to recognize the pattern it in real time and act quickly.

Testing

Have you done your testing? Your clearly defined set up needs to be tested it to evaluate the probability of a successful outcome. Trading without the likelihood of success is gambling rather than trading. The trader that attempts to test ‘a continuation pattern within an established uptrend’, first needs to define what trend is and then the exact characteristics of the continuation pattern. Hand drawn trend lines are likely to produce different results from computer generated ones (e.g. moving averages). Continuation patterns come in all shapes and sizes: rectangles, triangles, pennants and flags – to name but a few. All of these too - are likely to produce different results from the other. And that’s just using two variables. The more variables you add, e.g. different candlestick patterns or indicators, the more complex and time consuming the testing process becomes.

Entry, Stop Loss & Targets

It’s a common mistake for beginners of forex to outline their entry, stop loss and target, not realizing the necessity for any of the above, or thinking they can take a short cut around it. If you don’t set out the ground rules by doing the necessary preliminary work, your journal is likely to meander aimlessly from pillar to post and get nowhere. You won’t be able to distinguish what you’re doing right from what you’re doing wrong and you won’t know what advice to accept and what to ignore. The likely result is that your journal will be useless without producing any useful conclusions and rules. You will be left feeling upset, irritated and confused even motre than you were before starting the journal.

Don’t let this happen to you!

Also read Forex Trading Psychology

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