Keeping a diary may not be the first thing that comes to mind when you are plotting your trading strategy, but it is perhaps the most important thing you can do to ensure continuous development. A journal is more than just a record of trades entered, stops hit and orders filled, it is a tool to understand your own reasoning at each point in time. Both writing and regularly reviewing a journal are among the most important things you can do to transform your profitability and the general soundness of your approach to the markets.
That said, there is a lot of variety in what you can include. The bare minimum involves trades executed, with rationales and entry / exit points. Some traders go much further, including details of general market conditions, economic news and even personal information. There needs to be a balance between including as much information as possible to ensure it is useful for review, and not making the task of journaling so onerous that you are tempted not to bother. Some general guidelines and a proposed trade journal structure are included below.
Why journal?
To really improve as a forex trader, you need to understand your own decision making process. That means going beyond ‘RSI above 80, 5 day moving average dipping below 10 – sell’, to understanding the general position of markets, and your attitudes to your own trades. Many traders are surprised to learn that their winning trades often occur during similar market conditions, with certain technical indicators, and perhaps even at certain times of day.
The point of journaling isn’t to make you superstitious, only entering trades at 10:10 AM because you once made a good one then, but to give a fuller picture of the sort of factors that impact your performance. Although many trading platforms now include retrospective trade details allowing you to easily calculate P&L, this normally doesn’t include your charting and rationale for the trade. Therefore it is important to make a note of everything you do.
Vital details to include
Traders are agreed on the need for a journal, but not all in accord on its contents. A few of the most important points include:
- General market conditions for each day.
- Relevant financial news to the session.
- Any trades entered, with rationale (technical or fundamental).
- General mood and notes, any breaks taken or background personal information.
- Longer-term background views on any relevant assets.
- Any trades closed, with as much attention to losses as to wins.
When to journal
A journal contributes to your overall risk management and performance measurement strategy. The most logical time to record everything is at the end of each session, once you have finished trading for the day. If you are a day trader, this will then involve an analysis of your total P&L, if you make longer term deals then you will analyse your open positions, any positions closed during the day and other relevant information.
It’s best to set aside twenty or thirty minutes to write out your journal after you’ve finished trading. This will get you in the habit of thinking logically about your own performance and the markets. Traders disagree on whether to write out everything by hand or use a file on your computer. The advantage of writing by hand is it can aid memory and gives you a physical object which you can consult whenever, whereas word processed or online files benefit from searchability and take up less space. Decisions like this come down to personal preference.
You should take notes for the journal throughout the day – jot down some key indices and overnight market news in the morning, record any trades through the day, and collate it into the review at the end of each trading session. This may initially seem like a waste of time, but it will lead to a much more studied reflection on the markets and allow you to more easily remember your own decisions.
The advantages of journaling
Keeping a forex trading journal is one of the most powerful and underrated tools you can use to improve your returns. Almost all traders find that they make the same mistakes over and over again, often linked to failures of mindset or overenthusiasm. Having written evidence of this helps minimise these events, and this provides one of the most important benefits to trading.
It is not uncommon for traders to depend on a few patterns or indicators, often the first ones they discover. Imagine you are a new trader who uses Fibonacci retracements, and manages to place a couple of successful trades within your first few weeks of trading. After this, you continue to use the same strategy, despite mounting losses from stopped trades. It is more difficult than it seems to identify when a given strategy has stopped being profitable, particularly once you develop an emotional attachment to the trade.
Trading is presented as a quantitative discipline, relying on statistics and exacting parameters. However, at least for manual technical traders using charts, there is a large degree of subjectivity. Identifying patterns, deciding where to place stops and trade exits and many other factors are dependent on your overall view on markets and mindset at the moment of trading. A journal is a powerful tool for giving background information and context on what guides your trading decisions.
Forex journals need not be very extensive to start being useful. Even a few months of completed journal entries will give you an important document to understand the markets. The act of writing them is also of great importance. By critically examining your own trades, you will start to behave more rationally, to analyse information and signals more dispassionately, and ultimately to trade better.
Market conditions
Looking back at the charts for a particular market, it is hard to get a sense of the actual mood of the markets in the period. Each tick upwards or downwards involved traders responding to news, hedging their exposure and exiting or entering trades. With a market journal, you are able to review historical data from a first hand account. Indeed, being given the opportunity to look through the journal of a more experienced trader is unique and powerful opportunity. By producing a written document that includes general market information, sentiment and trade data you can flesh out the otherwise sparse message of ‘the line’, giving a richer account of trading history.
This is not merely interesting, it is essential to improving your responses. Do you often panic in a risk-off environment? Do you overreact to non-farm payrolls? These are two very common mistakes that effect even the very largest traders, and ones that can be easily identified with a trading journal.
Unlike equity markets, forex risk cycles are sometimes less clear on charts. Moves tend to be smaller than for stocks, and there is not the long term continual growth than gives (most) stock charts their characteristic upward slope. This means you need to look at other factors, and a daily market summary is an excellent source.
Journal organisation
Write as much or as little that feels natural. Two or three sentences on market conditions, a list of trades, and a line assessing your own mindset and performance would suffice for a journal entry. Some days will see little market activity and short entries, others will naturally be much more involved. However little you write, make sure you do so every day.
If you are writing online, choose whether to keep one long file where you add days or separate files saved in a folder. In a notebook, a new page for each session is recommended, unless the entry is very short. Be sure to always clearly mark the date at the top of each entry.
How Rakuten can help
Journaling helps you understand markets and your own response to them. Another powerful tool for achieving that is a demo account. If you feel ready to take this next step, why not open a free demo account today?