To trade on the forex market successfully, it is important to have a trading strategy, and for sure every successful strategy has been tried and tested over time. One way to develop a successful trading strategy is to keep a detailed log of your trading activities over specific time periods in order to determine what trading strategy works best for you.
A trade journal is a meticulous record of trading activity. It’s like a personally-created analytics tool in which you enter your trading data, and, after a while, you can measure and track your trading decisions, figure out what works, what doesn’t, and what can be improved. The trading journal makes traders who record their activities on the forex market disciplined, accountable, and helps them develop a trading strategy that is effective.
Another reason why it’s important to keep a trading journal is because it shows your strengths and weaknesses . This helps to change destructive habits and also boosts trader confidence. Let’s say you’re trading in EUR/USD with a strategy you’ve used before and documented in your journal. You place a buy order, the trade looks good but, suddenly, the price begins to drop, you’re losing pips, and you’re scared that the price will continue to fall - so you close the order at a loss. A few minutes later, the price shoots up again, and, this time, it crosses the take profit price you set previously. This is a typical example of fear leading to panic, which is a destructive habit that, fortunately, can be changed over time by following the trading plan and having confidence when conducting trades.
The first thing to remember when documenting your trading activities is that it’s your trading journal, so data should be presented in a way that you can easily understand, analyse and interpret.
There are various ways to keep a trading journal. It could be written, typed on a computer, you could use audio recordings, pictures or video screen captures with notes on them, or you can even use any software or spreadsheet, usually utilised to manage large amounts of data, like Excel. A combination of these methods can also be used, but the key factor is finding what works for you personally . Some brokers also offer spreadsheets which can be used to record trading activity.
So, how can you build an effective trading journal?
Begin before the trade and end after it
An effective way of recording your activities during your trade is to begin before the trade and to document your activities as you go. This ensures that that you don’t leave out little details that could be important to your strategy or could negatively affect your next trade (Baby Pips).
An effective trading journal contains all the necessary information about a trade and, as such, should contain:
- Entry date: The day you initiated the trade.
- Security/Forex Pair: The currency pair you’re trading in.
- Bought/Sold: Here, you specify if you initiated a buy or sell order. You can even specify the price of the pair when you initiated the trade.
- Stop Loss and Take Profit Level: The stop loss level is your determined level to cut your losses if the price reverses in a direction contrary to your trade position, while the take profit level is a set price for which a trade will close with profit when the price reaches the set target.
- Possible Risks, Rewards and Position Size: This is a record of how much could be gained or lost, as well as the size of the lot traded (micro, mini, or standard).
- Exit Price: This is the price at which the trade was closed.
- Pips Gained or Lost: How many pips did you gain or lose?
- Planned Risk to Reward Ratio: What was the risk-reward ratio you had planned before initiating the trade?
- Actual Risk to Reward Ratio: This is the risk-reward ratio at the end of the trade and can help you determine if you’re taking profits prematurely or taking unnecessary large risks.
- Total Profit or Loss: At the end of the trade, how much did you gain or lose (Learn to Trade the Market)?
- Indicators: What indicators did you use and why?
Another important way to build your trading journal is to observe the market during your trade. This can help you identify patterns on the intraday chart. Screenshots of the chart, coupled with notes attached to them, can help while observing the market during a trade. Over time, you can also review your notes to observe your trading patterns and develop your trading strategy. Market patterns will also become evident to you and you can continue to develop your strategy.
Monitor your emotions
As the price goes up and comes down, so do our emotions, especially if you’re looking at the trading chart. Trading journals also help mirror our emotions during trades, and documenting how you felt during a trade can help you manage your emotions better next time (Baby Pips).