Value Of Trading Journals
Trading can be a complex and demanding profession and traders need to be constantly in the thick of action. Typically, there is never a spare moment for anything other than researching and discovering a potential stock that is worth trading in. Obviously, in such circumstances, having to maintain a trading journal can be low on their priority list.
But then, why do the most successful traders have a habit of maintaining a journal and why is it so important to them? For a tool that can be invaluable to any trader, the trading journal needs to be given the due importance it deserves. But first, let us get to understand it better.
What Is A Trading Journal?
At its simplest, a trading journal is a diary that a trader keeps of all that transpires at work and the thoughts that come into his mind that relates to his trading experiences.
In fact, it is very much like a diary that some of us prefer keeping so that we can record what happened in a day and how we felt about it. The only difference is that a trading journal is not actually a personal diary but a journal maintained in a professional capacity.
Most trading journals are a log of the trades done and contain specific information pertaining to what has been bought and sold. This can further entail data points that include entry and exit price, the quantity traded, the basis for taking that position and such details. It can also feature the target, the stop loss and even notes that record insights and action items for the future.
As this is not a regulatory requirement like maintaining books of accounts, there is no pre-set format or template to a trading journal. There are plenty of useful examples shared by traders but, finally, it is about what you are looking to achieve out of it and how you want to structure it.
Finally, a trading journal can be a free structured and highly customisable diary but, for best results, should contain the most essential and impactful points of data and information to facilitate future trading.
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Why Maintain A Trading Journal?
As a busy trader who has to constantly update himself on information and data, trends and patterns, besides the feverish pace of trading itself, why should you maintain a trading journal? Why do smart traders take out the time and effort to ensure they log in all their trading activities regularly and refer back to them?
Clearly, there are many benefits of having a trading journal going, and here are some compelling reasons you should too. The value of trading journals can be best understood from these obvious advantages they can fetch if you were to maintain them diligently.
To capture and record data and events
By now, we know this reason well enough. One of the biggest pluses of a trading journal is the basic ability to capture and record all the actions done during a session or a day.
This diary is a first-hand repository of all the trades you executed during a period and can be the ideal reference material for you in the future. It is the kind of library you can build bit by bit, day by day that can be a gold mine of information later.
Make notes and observations
What makes a trading journal stand apart from widely available, general charts and data are the personal level notes and observations you make there. This nuanced and relevant databank of insights adds a hugely important layer of intelligence to all the generic information.
The more the details and the textured your comments, the better will be the net output you can infer. When done well, these may well be of more value to your future trading than many market reports and analyses.
To review, identify and learn from your trading journey
So, with so much data and information in one place, this becomes the perfect compilation of your trading history, complete with achievements and lapses, the highlights and the low points.
This can be the best learning and revision material that you can refer to for gaining insights into what you did right and reviewing the decisions that did not do well. It is like having your very own coach and mentor guiding you and correcting you on the wrongs while, of course, giving you occasions to motivate you on the rights.
Assists in self-appraisal and goal setting
A journal is the right document to refer to when you want to appraise yourself and your performance. Are you growing steadily both in terms of profits and volumes? How well are you improving with keeping losses down and managing risk? It is all there in the trading journal and can give a cold and fair assessment of your progress.
Similarly, as the next step, it can also provide you with a roadmap of the future by evaluating your performance so far and giving a direction on new goals. How much more can you take on without risking your capital? What should be the natural trajectory of your upcoming targets based on the learning and performance curve thus far? In short, the trading journal can be your mentor and your boss even!
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Helps in course correction
Another useful value addition that trading journals give you is the ability to provide insights when you make a mistake or are about to make one. From the earlier entries, you can look for parallels and similarities of a present situation against the past.
This is akin to having a much more experienced colleague or even a mentor advising you to correct your course should things look bad.
Useful to spot trends
A well-maintained trading journal is replete with data and information. This can be a treasure trove of intelligence that can show the way ahead by spotting trends and catching patterns.
This feature can throw up opportunities that otherwise could miss you in the hurly-burly of trading action.
Can be an outlet for emotions
Of course, keeping a diary is a great way to release pent-up feelings. So, a trading journal can also be the perfect outlet for all those emotions – positive and negative – so that you can return back to the next trading day fully relieved of them. These observations can also be a source for motivation and learning too, depending on whether the entry was of an instance that was a hit or a miss.
The Challenges Of Keeping A Trading Journal
So, what are the challenges of keeping a trading journal? Let us take a look at a few reasons why people refrain from keeping a trading journal.
Though keeping a trading journal is one of the key factors towards the success of a trader, day traders or short-term traders find it difficult to keep a journal just because it is time-consuming. It makes sense too, how are you supposed to keep a journal when you are in the thick of action? On the contrary, it could be counterproductive and lead to missed trades when you get an opportunity.
You do not have to jot down every single trade you conduct, but instead, make a note when something significant occurs so that you can look back over your trades and assess what worked and what did not. Instead of a handwritten journal, you could even take screenshots of your daily transactions, organise them in folders and review your trading history.
It is not always good news
Many traders fail to sustain journals because of the failures and mistakes they make on their trading journey. Instead, you need to make observations, try to identify the trading mistakes and not commit the same trading mistakes again.
How To Set Up A Trading Journal
Given the utilitarian nature of a trading journal and to derive the most from maintaining it, there still are some steps and best practices to setting up and running it.
To get started on creating your own trading journal, it is fairly simple, really. At its most basic, you could set up a well-thought-out and structure excel sheet. But then, there are plenty of tools and software available today to help you get a more sophisticated and readymade version.
How To Maintain A Trading Journal
Once you have set up your trading journal as per your requirement, it is time to consider the aspects of maintaining it diligently. Here is a broad outline that can be followed to maintaining your journal.
Capture the trades done: Log in all the trades done with the stock name, time of the transaction, the entry and exit price, the size of the trade, the target and the stop loss, and other points of relevance.
Include supporting charts: To support the data points, including the chart of the period of trade lends a graphic character to the details. Technical indicators and trendlines can give a more visual background here. The exit and entry points, besides the levels of support and resistance, can be useful too.
Give additional texture with notes: Along with the numbers and the images, it will help to add in some more texture in the form of notes. Having some of your thoughts and observations can give a personal touch to the journal entry that can be invaluable later.
With a well-maintained trading journal that contains details – data, charts, and notes – of your trades, it can arm and empower a trader to increase his chances for success and reduce the risk quotient. Of course, to derive the best value from the trading journal, it also depends on how well and frequently the journal is reviewed and some practical takeaways gleaned from it.
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