What is Forex Trading Journal?
Forex trading journal is simply a diary (or anything where you write) for keeping the records of all the trades that a forex trader makes. A trading journal can be used for various purposes. Generally a trading journal contains position (buy/sell) in the market, position size, result of the trade, high/lows while making the trade, time held and the state of mind. There are no any universal hard and fast rules on how to keep a forex trading journal. It can vary from person to person. One can decide what to keep and what not to keep on his/her trading journal. However fundamental things like entry price, stop loss and take profit levels are must in every trading journal. A trading journal can also be used to evaluate the trader’s strategies. In short we can say that a trading journal is a personal document that the traders can customize to their needs.
Why Is It Necessary To Keep A Trading Journal?
One may think that why it is important to keep a separate is trading journal when all of the brokers provide real time transactions of the trades. Yes, broker’s record contains buying price, selling price, profits, losses, margins etc. but that is not enough. There are other benefits of keeping a separate trading journal. Habit of keeping a trading journal can be very rewarding especially to the self taught traders. Most of the traders do not have a coach or mentor. A mentor helps to pointing out the mistakes, recognizing things that went well and keeping one disciplined. A systematically kept, detailed Fx trading journal can be almost good as having a mentor. Keeping a journal may be a boring and time consuming task but a forex trader can learn more from reviewing their own trades than any trading books or even attending trading seminars.
Important Reasons for Keeping A Trading Journal
- Historical Record
In the long run, the journal will provide a historical outlook. Trading journal will not only summarize all the trades but it will provide the state of your trading account, at a glance showing each individual trade. Your trading journal can be the indicator of your trading performance. It will help you to figure out what went wrong and what went well. You can take steps to correct the mistakes and keep repeating those activities which were rewarding in the past. You can also study which currency pair worked best for you and even what time frames fitted best to your trading style. You can also keep records of the experiences when you traded during the news and how you lost the money so that you wont trade during macroeconomic events in the future.
- Planning Tool
A good trading journal not only consist the record of actual trade data, but it should also generate information on what your future plans are for each trade. So such habits will force you to think before taking any trade and will help you to main the self discipline. Where to enter, where to set your stops and targets can be used as a planning tool.
- Methodology Verification
Keeping a trading journal can be the best way to test your trading methods. You can see how well your system works in changing market environment (trending and ranging). Trading over a long period of time with specific method and keeping a trading journal will really enable you to know a lot about your trading method. If the results were good that means the system works for you and if not it is the time to reconsider finding the system that works best for you.
- Mastering Your Psychology
One of the most powerful ways to use a trading journal is to change your bad trading to good ones or in short we can say maintaining self discipline. Destructive trading behavior can be converted to constructive ones. That can be done with high level of self discipline which can be achieved by using the trading journal effectively.
Things You Must Have In Your Trading Journals
The answer is simple you need everything. You should record everything you do and feel before opening positions in the market, during the trade, and after the positions has been closed. So following are the list of things that you must have in your trading journal.
- Potential Trading Levels
There should be a valid reason behind every trade you make. This is also known as being rational investor. Potential trading levels are determined by the methods you use. You may enter when two moving averages crosses or when the RSI indicates divergence it depends upon your system. It is always recommended to keep the screenshots of the chart where you see the potential entry levels. Later on this picture can be used to review your trades. This will be useful to remember the reason why you entered the trade. Potential trading levels is the area where you believe that a trade has a high chance of success. It is always suggested to keep the records of the potential trading levels in your forex trading journal.
- Entry Level
Entry level is the price level where you actually decide to enter the market. Once you figure out the potential trading levels it is time to know what your entry level should be. Once you find your entry price level you don’t jump in the market blindly. You should wait for the right time to enter in the market. Suppose if you are looking to sell a down trending currency pair on a 4 hour chart the best thing you would do is jump in to 15 minutes chart and find your accurate entry level. So, in your trading journal you should actually record how you entered the trade and why. What was your logic behind your entry?
- Position Sizing
Position sizing is how much volumes you are investing per trade. This falls under your money management plan. Write down how much you have to risk per trade so that you will never risk more than that. Usually when traders have a bad trade they immediately take another trade to recover with the bigger volume which becomes disastrous. So by having written your money management plans on your journal you should be consistent with the size of the position you invest every time.
- Have Your Plan B
You should write down your plan B on your trading journal. Plan B is having alternative strategies if the price drastically moves against you. Two different traders could take the same trade position but can have totally different outcomes. If one makes money in that particular trade it isn’t sure that another will make money too. It depends upon the trade management strategy. A disciplined trader knows when to exit even if the trade is in loss as a part of money management strategy. But one who doesn’t have any plans will really hurt their balance. It is crucial to have all the plans in hand even before the trade is executed. After you enter a trade you should be able to figure out all the possible outcomes and the plans for those outcomes. When you take a trade its Stop loss and take profit should be already determined.
- Trade Retrospective
Retrospective is to look back at events that have already occurred in the past. Once your trade has been completed it’s time to review it. You can review the whole process to understand what went right and wrong. You can review your trades by asking following questions to yourself:
How well did your trade perform?
- Was the position size appropriate for your account size?
- Could your entry level be better?
- Did you maintain the discipline during the trade?
- Did you trade according to your initial plan?
- What events and news caused the market to move in that way?
Use the answers to manage your trade better.
How well did you manage your trade after its execution?
- Did you monitor the market effectively? If so, how? If not, why not? The answers to these questions will generate lots of useful information about your trading.
- Did you customize your trade plan?
- Did you adjust your stop loss to break even?
- Did you exit your trade based on your initial trading plan or not?
Based on your answers, you will know what role your emotions have in your trading and how disciplined trader you are.
Keeping A Forex Trading Journal Is Hard But It Is Worth It.
Yes, keeping a trading journal is hard but not as losing all your trading capital. It helps to master your psychological aspects which had been holding you back from making money. It makes you a disciplined trader. You will learn to be a rational investor not a gambler. We should always remember that most of the time it is not the poor system that is responsible for poor trading but the inability of the trader to properly apply them is. Always begin to write the journal before the trade and end it after the trade.