“If you can’t measure it, you probably can’t manage it… Things you measure tend to improve.” – Ed Seykota
Keeping a trading journal is like writing your own trading book about yourself. Writing a trading journal forces you to put your feelings, thoughts, mistakes, risk management parameters, and ego problems on paper. Writing helps clarify and become mindful of the thoughts and emotions that lead to trading errors. Having a great trading plan and following that plan consistently are two very different things. The major causes of being and unprofitable trader are having no edge, mental mistakes, and bad risk management. A trading journal can document your errors and show you where you are going wrong in any or all of these areas. With the data from a good trading journal you can see both when you were successful and when you failed and why. The goal of good trading is not to make money every time but to follow your own trading plan with discipline every time. If you have a system with a edge and follow your process you will make money over the long term. You will lose money if you have no edge or if you have an edge but lack the discipline or risk management skills to implement it.
How you keep your trading journal is not as important as whether you keep it. A trading journal can be a notebook, on a spreadsheet, or using advanced software. Whatever you find most comfortable and useful.
What should your trading journal document?
Before you start trading:
- Your return goals.
- Your risk tolerance for individual losses and total account drawdown.
- Quantify your risk of ruin.
- What are the backtested results of the signals you will be using?
- Your watchlist and why they are your choices.
- Are all the items on your watchlist liquid enough to trade with little slippage in the bid/ask spread?
- The principles of your profitable trading system.
- The quantified entries and exit signals for your trading system.
- Your position sizing parameters.
- The rules for total risk exposure and correlation.
During each trade:
- Document your chart at entry.
- Your entries and why you chose to enter at that price.
- How do you feel on entry? What are your expectations?
- Your position size and why.
- Your initial stop loss plan if you are wrong.
- Your profit target expectation on entry or how you plan to trail your stop if you have no profit target.
- What is your risk/reward ratio based on your entry level versus your profit target or is the win size open?
- Document your chart after you exit.
- How did you feel on the exit?
- What errors of execution did you commit if any?
- What would you have done differently to minimize the size of a losing trade?
- What would you have done differently to maximize the size of a winning trade?
- Do you have any regrets?
- What were your thoughts during each stage of the trade?
- Did you have faith in yourself to follow your plan?
- Did you have faith in your signals to make money over the long term?
- Are you mentally comfortable trading this timeframe?
- Are you comfortable with your trading system?
- What was your stress level during each step of the trade?
- Does your trading system fit your own beliefs about the markets?
“Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible” – Ed Seykota