Nowadays, when almost every broker provides a detailed history of your trades, keeping a trading journal may seem pointless. The Broker is able to provide full information on each trade, including information on the balance, use of margin, profit and loss. Nevertheless, there are certain benefits of maintaining a trade journal, which we will talk about in this article.1. Storage of historical dataThe Trade Journal provides complete information about past trading operations. It not only reflects the final information on transactions, but also allows you to quickly determine the status of the trading account at the time of the transaction and the impact of transactions on the balance over a period of time. In other words, the trade journal is a personal database of your personal performance indicators, which allows you to determine the frequency and profitability of trade operations, a set of the most successfully used currency pairs and the best time intervals for trading. Keeping the magazine greatly simplifies analytical research of trader’s trading activity.2. Planning toolIn the trade journal it is necessary to record not only the actual results of trading activities, but also trade plans for each of the transactions. This allows the trader to determine in advance the entry point, the level of risk accepted, the target profit and possible adjustment of the position in case of changes in the market situation. In other words, the trader’s thoughts turn into concrete numbers, recorded in the trade journal, which can be used in practical trading. The trade journal is the basis for trade planning and the formation of a clear trade plan.3. Testing the efficiency of the strategyused Maintaining a trading log allows traders to test the efficiency of the strategy used on their own data. A trader can use historical data to assess the effectiveness of his own system in case of changes in market conditions and answer questions: “How does my system behave in the directed market, in the side market, in different time periods? How does it affect trading decisions and the placement of stop-losses? Is the right choice of stop-losses?” The trade journal should contain exhaustive information about the trader’s trading activity in order to be able to perform the most thorough analysis.4. A way of correcting habitsOne of the most important advantages of keeping a trade journal is the ability to analyze your own behavioral patterns and transform destructive habits into constructive ones. Since, thanks to the magazine, trading is carried out in accordance with a certain plan, the trader gets confidence in the correctness of their own actions. Profitable deals are no longer random, and “planned” losses do not allow you to feel like a loser and reduce psychological pressure. Confidence is an extremely important psychological factor and allows you to get rid of greed and fear inherent in all human beings. As a rule, if a trader starts earning, he wants to earn even more; if he loses, he feels fear and panic as the account balance decreases. Using the trading journal allows you to create a trading plan and monitor the correctness of its implementation, which, as a result, has a positive impact on the professional development of the trader. A good trade magazine will be your best friend and mentor on the way to success in volatile market conditions.
The trade journal should consist of two parts
It is recommended to follow two basic rules when keeping a trade journal:
- Information about trade operations is recorded in the form of a table, the rows of which are filled in chronologically from top to bottom. All trading operations and all related data should be entered in the table. You can use Excel spreadsheets that automatically calculate the final results and perform mathematical calculations to help you get rid of algebraic errors.
- It is necessary to put the entry point prices, stop-loss and profit levels on the chart. It is also necessary to specify the reasons that prompted you to open this position. Save charts with the following information:1) Fundamental causes. Example: “I believe the dollar will continue to weaken due to the Fed’s policy of keeping rates below those of other countries and the existence of a trade deficit
2) Technical reasons. Example: “The dollar has reached the resistance level, so it’s a great opportunity to take a short position.”3) Psychological the reasons. Example: “Traders avoid risks associated with possible corrections, and the U.S. economy is not in the best shape, as evidenced by GDP data and weak job creation report
Leave comments on the price chart printouts. It is recommended to use separate trade journals for each applied trading strategy. Do not mix the data of different trading systems in one journal, as it increases the number of variables and makes it difficult to analyze the overall results.
After the accumulation of data on 20 or more trading operations carried out within one trading system, a trader can calculate the mathematical expectation and reliability of the trading system:
E= [1+ (W/L)] xP – 1 W = average profit on winning transactionsL = average loss on losing tradesP = profit margin
Example:If according to the results of 10 trade operations, 6 of them turned out to be profitable, the percentage of profitable transactions will be 60% (6/10). If the total profit on the winning trades is $2,400, the average profit on the winning trades is $2400/6 = $400. If the loss is 1200$, the average loss on losing trades is 1200/4 = 300$. By substituting these values into the formula, we get the result: E= [1+ (400/300)] x 0.6 – 1 = 0.40 or 40%. Positive mathematical expectation of the system, equal to 40%, indicates that the trader will earn in the long run 40 cents for every dollar invested.
ConclusionsA trader can feel confident if he clearly knows the profitability of his trading system. If he lacks confidence, he is not able to execute trading operations according to the established plans and cannot make correct trading decisions due to the excessive flow of analytical data. Maintaining a trading journal significantly reduces the load on the trader and contributes to future profitable trading (to increase the amount of potential profits a trader can use leverage. For more information on leverage, see Leverage on Forex: A Double End Stick.)