Elite performers in all competitive fields study the past to help improve their ability in the future, and the same goes for elite traders, writes Rob Pasche of DailyFX.com.
You've most likely heard it before that journaling can be used to improve your trading, but for whatever reason may not have tried it before. Maybe it was too tedious or too time consuming? Regardless of your rationale against journaling, I do think you should reconsider.
A good parallel to this is the world of professional sports. You have athletes that have physically trained their whole lives to be the best at what they do, but a large part of their routine is reviewing past matches, games, and learning their opponents. They look for weaknesses in their game in order to improve themselves and look for weaknesses in their opponents to exploit them. This is the exact same attitude a professional trader should have when they review past trades. Consider the following three reasons to begin adding a journal to your trading routine.
Reason #1 - Journals Increase Trading ConsistencyThe most basic use of a trading journal is to increase consistency. This is done by detecting errors made on your previous trades and making sure you do not make the same mistakes again. You will want to review each setup and review your rules to make sure that you are following them correctly.
Some obvious errors would be reading indicators incorrectly or setting stops and limits at wrong prices due to mis-clicking or entering the digits off by a one decimal place (these things happen.) Some harder to detect mistakes might be opening a trade too early without letting a setup to fully develop. In our DailyFX strategy sessions, we always speak of the importance of letting the most recent candle close to confirm a valid signal from any technical indicator. Was each signal still valid after the candle closed for each of your trades? Or did you get faked out on false signal?
I recommend creating a dedicated folder on your Desktop for your trade journal. By saving each of your setups, you will be able to see exactly when and where you opened your positions and ensure that no mistakes were made. Ideally you would like to see these previous charts and have no regrets on the trade placed. Setups so clear that if they were on live charts, you would still place the same trade. That's consistency. To assist in remembering these trades, you can also keep a formal journal.
Reason #2 - Journals Keep You Accountable
Depending on the route you take, trade journals will keep you accountable in one of two ways. Either you will keep your trade journal private and review it on your own, or allow other traders to take a look at it and give feedback. Both methods are effective and will help keep you accountable.
If you go the personal journal route, it's probably easiest to keep your thoughts and screenshots inside a Word doc (although a physical notebook could work to simply jot down your thoughts.)
If you go with more of a public journal, you will probably want to record your trades and thoughts on an online blog or forum. This will allow traders from anywhere in the world to see your trades win, lose or draw.
Whether you are reviewing your journal yourself or allowing people online to review it, this gives you extra incentive to place clear, valid trades on your account and make it more difficult to deviate from your strategy. You will know in the back of your mind that you will have to face your decisions later on in your journal and possibly have to face others if your journal is public. This will help you become more aware of times when you let emotions dictate your decisions rather than your strategy's logic or when you decide to "get creative" and place a rogue trade without a strong basis for it.
It's good to have accountability. Many traders can fool themselves into thinking they are rationally making trading decisions only to find out later that they didn't follow their strategy at all.
Reason #3 - Journals Help You Improve Your Trading Technique
Diligently looking at your trades over and over again is what separates ‘minor league' traders from the professionals. Seeing how each trade plays out you may discover tweaks that can be made to further improve your strategy. Getting better every day is what it's all about, and having a journal to go back and review can certainly do that.
Here are a few examples of ways your strategy could be improved:
Using trend filters to remove counter trend trades
Trading specific strategies only during appropriate market conditions
Increasing your reward:risk ratio
Decreasing overall leverage used
Trade Like a Professional Athlete
Trading is hard and it's competitive. It is clear who the winners and losers are and in order to be the best, you need to emulate what the best do. It takes a little bit of extra time to journal, but it could make all the difference. Create a journal to increase your consistency, increase accountability, and improve your trading technique.
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