The definition of insanity is doing the same thing over again and expecting a different result.
You’d think that would be common knowledge by now, but you’d be shocked at how often traders repeat the same mistakes over again.
Instead of keeping detailed records of their trading, they’ll instead rely on a “foggy memory” to guide them through the decision making progress.
It’s madness… something that doesn’t work in trading…or other fields for that matter…
A bodybuilder has a journal to track his every movement, such as his daily diet, weight, and strength.
A scientist has a journal to record their latest research, findings, and the results of recent experiments.
So why not do this for trading? It is a profession too, after all!
Most traders don’t even have a trading journal let alone know what a trading journal is. Why is that?
Maybe they don’t know how to create one… see its value… or understand how to put one together.
Do you fall into this category? If you do, that is ok, because I will explain to you (including step-by-step directions) on how to create your own trading journal.
What is a trading journal? Why do you need one?
A trading journal gives you insight on the trading day as to what happened. It’s a document that allows you to explore: what went right or wrong on a trade, as well as, act as a tool to eliminate your weaknesses and build up strengths.
When I first started trading I would jump from strategy to strategy… indicator to indicator…and from one chart setup to another…
I was all over the place. And while trying new stuff out as a trader is vital to your growth. After all, how will you know what works best for you without testing things out?
So I experimented…some trades showed promise… while others proved to be a waste of time.
If I had kept a more detailed trading journal I would have been able to identify my bad trading habits earlier and eliminate them. That, in itself, could have saved me money.
On the other hand, if I just took my best setups, my account would have grown almost seamlessly.
How does a trading journal assist in finding an edge in the markets?
First, every profitable trader has a consistent set of actions they follow…and they generally don’t deviate from this.
A trading journal assists with identifying a “breach” in the plan. It can unveil exactly where your pain points are—and direct you to the steps to alleviate them.
It will highlight where you broke down from your set of actions!
How to create a trading journal?
Start off by writing down every entry, exit, profit, and loss. Include information like the overall market conditions and news that may have made a stock move differently than you expected.
Make sure to be extremely detailed here, as this is the meat-and-bones of what you will be reading.
Break down your trading journal into key parts. I like to use three basic sections: Before, During, and After the trade occurs.
This is the simplest way to get a “birds-eye view” of each one of your trades.
Before your trade: an analysis of the markets and the setup you are looking for.
Write down all your ideas and thoughts in the morning. Some examples include:
- What did the futures do overnight?
- What stocks are gapping up or down?
- What catalysts are moving the stocks I want to trade
- What stocks had earnings last night?
- Do I want to trade momentum or mean reversion today?
Hindsight trading is fun to play… but it makes no money.
If you don’t write down your trading thoughts and ideas then how can you consider yourself a prepared trader… You can’t.
Traders are like snowflakes—we’re all different.
For example, day traders are known for getting up early, conducting research and generating ideas for trades to take in the day. While some option traders will wait days or weeks before placing a trade.
Perhaps you like doing research on the weekends if you are a longer-term swing trader.
Whenever your research is done, make sure you write down your thoughts and ideas.
Here is an example:
Setup: Daily timeframe, buy a stock on a gap-up that is in an uptrend.
Goal: Trade the initial momentum created by the gap that caught people off guard.
Stop Loss: Exit at yesterday’s high. If it fills the gap, it will keep selling off.
Note: My trade setup is aligned with my plan. I watch for stocks gapping up or down in the pre-market session.
My trading journal has gotten too long. Now what?
Summarize your trades and setups and create categories that keep similar trades grouped together. This will cut back on the clutter you will start to have.
Group all trades into timeframes and direction you traded.
An example is:
Long AAPL at 9:30 on the gap higher in uptrend. It held the gap and rallied throughout the day. Exited at the close of day for a profit.
Short NFLX at 9:30 on the gap lower in downtrend It held the gap and rallied throughout the day. Exited at the close of day for a loss.
Short JPM at 12pm on news from Brexit. Bad trade, took max loss. This was not in my trading plan. Need to ignore the news from now on.
So far make sense?
What else should I include in my trading journal?
Here are some relevant metrics you can use.
- Date – Date you entered your trade
- Time Frame – Time frame you entered on
- Setup – Trading setup that triggers your entry
- Market – Markets you’re trading
- Lot size – Size of your position
- Long/Short – Direction of your trade
- Price in – Price you entered
- Price out – Price you exited
- Stop loss – Price where you’ll exit when you’re wrong
- Profit & Loss in $ – Profit or loss from this trade
- Initial risk in $ – Nominal amount you’re risking
- R – Your initial risk on the trade, in terms of R. If you made two times your risk, you made 2R.
Don’t forget your charts! Visuals are always a great way to help keep what happened straight in your mind weeks afterward.
So what tools do I need and where do I create this trading journal?
- Google Docs
- Google Sheets
- Microsoft Excel
- Snipping Tools
- Microsoft Paint
So to recap:
You must have a trading journal. It helps you find your edge in the markets, along with what your strengths and weaknesses are. This will help improve your trading.
It is split into 3 key parts, before, during, and after the trade.
Before the trade is where you will analyze the markets and what trades you are looking for.
During and after the trade is where you will record every play-by-play. This will identify weaknesses and where to improve.
Now if you follow those steps and create a journal consistently, before you know it you will be off to becoming a more profitable trader. However, if you need some help, I got you, it comes in the form of a service I created called Daily Deposits—click here to get started.