How to use a trading a journal to reduce your learning curve

As a new trader, riding the emotional ups and downs can be a very difficult task. It is human nature to feel the pain of a losing trade. The losing often outweighs the positive feeling of any winning trade. Dealing with the emotion of trading can be an incredibly difficult task. It can cause even the best system to fail. A trading journal especially early on in a trading journey can provide important feedback and information about the effectiveness of an edge. The reality is that early on profit and loss can be terrible measure of an individual’s trading ability which is why a journal is so essential.

There are many different formats and styles of journals that can be used. Some like to base their journal around a calendar. Others like to pick out their best and worst trade each day and analyse them intensely. In the end, it doesn’t matter what style is chosen if a consistent structure is followed. Both quantitative and qualitative measures that ca be used to measure performance.

What to include in your journal?

Below is a breakdown of elements that can be analysed in the trading journal.

1. Initial trade idea – This is the overall basis of the trade, it can be related to a technical pattern, fundamental factor such as a news or a mix of both. Some traders call this the trade hypothesis or thesis. In its most simple form, it is the very reason a trader enters into a trade. When journaling, it is important to evaluate the strength of the idea, whether it was correct and why or why not the trade was validated or invalidated. It is also worth noting if the idea is a common one, such as news catalysts, repeating technical patterns. This can also be elevated by understanding how different trade ideas work together to create stronger overall trade ideas.

2. Entry – Breaking down the key elements of the trade are important aspects to a journal. More specifically outlining whether an entry was ideal, correct and managed well. Was the entry chased or was patience shown to achieve a more ideal entry. The entry is also a part of a trade with heightened emotion. Therefore, journaling how emotions were managed and ways to improve emotional management is an important aspect of reviewing the entry.

3. Exit – It goes without saying that the exit is the reciprocal of the entry and just as important. Analysing whether the exit was correct at both the time and in hindsight is an important step. By continuously analysing both entries and exits, a trader will likely see an improvement in this aspect of their trading. In addition, they will potentially remove external factors such as emotion and noise from other influences such as twitter.

4. Sizing – Sizing is an extremely tricky area of trading to master and there are many different theories on what sizing tactic is the best for each trade. Some traders like to increase size depending on how strong a trade set up is whilst other like to have more consistent sizing strategies regardless of the strength of a trade. When reviewing it is important to make note of whether the sizing strategy worked. Trading with too much size can affect the active management of a trade as a trader can lose sight of the trade at hand and become too concerned about the potential outsizes loss.

5. Trade management – Whilst all the above can all constitute some level of trade management reviewing, analysing the whole management of the trade is vital. This can include the effectiveness in taking profits or losses and how the trader has dealt with their emotions. Management of fear and greed are the two most common emotions that a trader feels.

6. Grading – Having some quantitative measure even though it is subjective can help classify many trades over a long period of time. Using either letters or a number ranking can be just one method. This allows for a trader to identify their best performing trades and where the strongest edge is.

This list should not be seen as exhaustive, and traders can tinker and adjust to suit their own trading strategy.

Reviewing the journal.

It is important to review the journal at the end of a set time whether it be weekly or monthly to see if common mistakes are occurring or a theme is emerging. If the same mistake keeps occurring, it may act as point of emphasis for future journaling or improvement. Ultimately, using a journal can accelerate the learning curve drastically especially for new traders.