By Rob Colville on July 11, 2014 in
What if we told you the best trading tool available is absolutely free? That perhaps the fastest and most effective thing you can do to increase confidence, consistency, and profitability requires as little as 20-30 minutes each week…no gimmicks, and no strings attached?
Sound too good to be true? Maybe it does, but here’s a cold, hard fact about trading: an effectively executed trade journal will make you better and more efficient than any “black box” trading system or “top secret” indicator ever will.
Far more than just a tool for tracking P&L, a proper trade journal will paint a detailed portrait of your strengths and shortcomings, actionable patterns, and tendencies you may not even know you have, not to mention help you monitor and achieve your own individual trading goals.
With that, here are the three most crucial components of any trade journal:
A good trade journal contains much more than just what you traded and at what prices you bought and sold. To really do this right, make note of the market conditions (bearish or bullish), volatility, and any news and/or economic data that was in play that day.
Also in your trade journal, include the time of day, and document the set-up and strategy being used, and perhaps more importantly, why. Note the stop loss and target levels (intended and/or actual), and your personal and emotional state at the time of the trade.
Sure, you’ll track your P&L in your trade journal, too, but all this other information is just as vital, and this is why: you’re likely to spot trends and patterns from the data in your trade journal that can immediately help you in your trading. For example, when and under what conditions a particular set-up or strategy works best (or worst)? Are you taking profits too soon (or too late)? And are outside factors from your personal life creeping in and affecting your trade decisions?
When we most recently discussed “Simple Trading Tips That Work in Life, Too,” one of the central themes was that “Honesty Is the Best Policy.” This is especially true when it comes to keeping records and analyzing the data in your trade journal.
Losing trades hurt, not just because you lost hard-earned capital, but also because you may then have to admit that either you or your trading strategy were wrong. It takes guts to own up to it, but doing precisely that in your trade journal is the best tool there is for identifying what really went wrong (and right) and then making the proper adjustments to improve future results.
None of that will be possible, however, unless you “tell it like it is” in your trade journal. Don’t just blame the markets for going against you whenever you suffer a losing trade. Did you hesitate, let fear or emotion get in the way, or break one of your trading or risk management rules? What really caused each losing (and winning) trade?
Write it down and you may be surprised just how quickly you’re able to see what you’re doing right, and what you need to improve upon in order to achieve your own unique goals (which you should lay out clearly on the first page of your trade journal, by the way).
Perhaps this goes without saying, but a trade journal is no good if you don’t actually use and refer to it. Write in it immediately following each trade, and you can start reaping the benefits from that moment forward.
Don’t try to go back and journal or analyze weeks or months of data, because too much will get lost in translation. More importantly, there will undoubtedly be patterns evident in just a few days’ worth of data, and you could easily use that to make adjustments that improve your results, prevent repeat mistakes, and best of all, save or make you more money.
It may only take a small sample of trades, for example, to see that you’ve been setting your stops and/or profit targets too wide, and that it’s costing you in these low-volatility market conditions. If that’s the case, don’t have it be weeks or months from now when you finally identify and correct that problem! That kind of instant feedback helps produce immediate improvement, and it’s all just minutes away when you take a bit of time to analyze the data in your trade journal.
It’s a beautiful thing whenever a set-up is so clean that it results in a trade you can simply “set and forget.” Before getting on with your day, though, take a couple minutes to log your trades in your trade journal, and try never to skip this step or put it off until later. We all know that we tend to forget almost all about it by then!
Be detailed and exceptionally objective—even if the truth hurts—each time you write in your trade journal, and then regularly analyze the data. If you do, then right there in front of you, you’ll have truly invaluable information and a veritable roadmap you can follow as you pursue your personal trading goals, with no overhyped or overpriced trading gurus ever needed along the way!