Isn’t that only for silly high school girls who write about their silly crushes on silly high school boys?
Ok, not really… high school girls keep DIARIES.
Forex traders keep trading JOURNALS.
Two entirely different things! Get it right! Geez!
Keeping a trading journal is actually a crucial task in any performance or goal-oriented endeavor. The key is to have some way to measure, track, and stay focused on improving your performance.
World-class athletes do it to keep track of what helps them to be better, faster, and stronger on the field or court. Scientists do it in the process of finding their next greatest discovery. And forex traders do it to help get them duckets!
What “getting them duckets” means in simple terms is to become disciplined, consistent, and most importantly, profitable.
A disciplined trader is a profitable trader and keeping a trading journal is the first step to building your discipline.
This might sound simple or easy but we assure you that to actually get started can be very difficult. In fact, many forex traders give up after a while and rely on the logs that the forex broker provides.
The logs or transaction history from your forex broker gives information that is, at best, marginally useful as it doesn’t tell you much of WHY you entered and exited the trade.
A forex trading journal isn’t just about writing in the prices of your entry and exit and the time you executed the trade. The trading journal is also about refining your methods and mastering your own psychology.
To be even more specific, it is about your individual emotional psychology before, during, and after the trade.
For example, your trading method says to buy USD/JPY.
But your gut feeling tells you that the trade is NOT going to work…
So you remind yourself, “I don’t think this trade is going to work. BUT I have to follow my trading plan so I’ll take it.”
During the middle of your trade, the price comes 3 pips away from your stop loss and you’re thinking, “OMG. This trade isn’t looking so good. I knew it! Why didn’t I listen to myself? I’m such an idiot! I’m about to lose here! I’ll just exit now.”
You then decide to close your trade.
A few moments later the price shoots to your original profit target. Had you stayed in the trade you would have made a gazillion pips.
This is why you should write a trading journal. This is a classic case that probably happens to too many traders.
We fail to stay in the trade, we fail to trade the plan and most importantly, we fail to distance our emotions from our trading!
If you keep trading like that and you don’t keep a trading journal, the balance on your trading account will become a big fat ZERO before you realize what you’re doing wrong.
5 Reasons To Keep A Forex Trading Journal
Okay, enough with the doom and gloom. Let’s just say that most expert traders keep a trading journal and review their trades consistently.
And you know what most expert forex traders are? Even though some won’t admit it…
They are BALLERS! They got the money. They got the cars. They got the clothes. They got the ice.
We might be exaggerating, but only by a little bit.
Besides helping you in your journey to baller status, there are other personal benefits to journaling…
- Defining yourself and your situation in life
- Keeping progress of your goals you’ve set in your Trading Plan
- Clarifying your weaknesses and strengths in your ability to perform and handle pressure
- Providing a way to self-coach and improve on your own
That last bullet point is probably the most crucial as most every new visitor that comes through BabyPips.com doesn’t walk down the path of your average Wall Street trader.
A well-kept, detailed forex trading journal can be almost as good as having a coach watching you over your shoulder and helping you learn those lessons. Heck, keeping a journal may seem boring and time-consuming, but a forex trader can often learn more from reviewing their own trades, than from reading a book or even attending a seminar.
Over time, your journal will grow with you and, if you keep detailed records on everything about your forex trading (from psychological issues, the market environment, system tweaks, etc), it will help you recognize important lessons like:
- What news event should be avoided
- How much more or less you need to risk per trade
- When you should start trading
5 Things You Must Have In Your Trading Journal
The answer to that question is simple…Everything!!!
You record everything you feel and do before the trade, during the trade, and after the trade has been completed.
Trading is a performance skill, regardless of your trading style or method.
Your outcome is determined by how well you analyze the market environment, your ability to create a plan or trading method, how well you execute that plan, and luck.
There are many variables that lead to success, so you have to write down everything to determine your weak and strong points.
For traders, that means recording:
- Who you are and your motivations for forex trading. To find the right trading method for you, you have to know who you are, your lifestyle considerations, and why you do the things you do.
- Market views and philosophy. This is how you understand and frame the markets, and how you make the decisions to act and manage the risk to your account.
- Observations of the market. Each day is different in the market, but that doesn’t mean there are certain “tendencies” or “behaviors” that you can take advantage of. With careful and consistent observation, you can find these “tendencies” and create or adjust your strategies to them. Also, if the environment changes, you’ll be on top of the situation and change with it!
- Trading mistakes and missed opportunities. Mistakes and missed opportunities are just as detrimental to your success as the market going against your trade. Closing trades too early, not taking legit setups, entering the wrong entry levels or positions sizes, etc. should be recorded in your journal so that you avoid the same mistakes in the future.
- Performance statistics. Many aspects of your forex trading performance can be quantified into hard data. This gives you a realistic, no BS picture of how you’re doing.
Before we reveal our list, we just want to point that this is what we believe should be included in a trading plan.
We simply provide this list so you can have a better idea of what to include in your own plan, but you don’t necessarily have to follow it exactly.
All right, here are our 5 “must-have” elements of a forex trading journal:
- Potential trading area
- Entry trigger
- Position size
- Trade management rules
- Trade retrospective
Again, It’s up to you.
It’s your trading journal.
Potential Trading Area
You need to have a valid reason for every trade you enter. This is also known as logic or rationale. You are not a caveman. Nor are you a gambler, right?
Why are you looking at this area to enter? This area is determined by whatever setup detection method you have written in your Trading Plan.
Your potential trading area stands between current price and your entry trigger.
We strongly suggest you take a screenshot of your chart showing this area. Try to make a habit of taking screenshots of your charts.
When it’s time to review your trades later, having the ability to see what happened visually will help train your eyes to see possible opportunities or traps to avoid on your charts in real-time.
This will help you remember the reason why you entered the trade, or make you realize some things that you may have overlooked.
The potential trade area is where you believe you will have an edge that you trade with a high probability of success, and that reward/risk ratio is in your favor. You must determine, for yourself, how you want to meet this requirement.
When you sat down in your chair in front of your screen, you were “ready” to trade. The potential trading area is where you “aim.”
The entry trigger tells you when to “fire!”
Your entry trigger tells you that once you’re in the potential trade area, when to actually enter the trade.
This is your specific entry technique. Now that you’ve decided on where you’re looking to enter a trade, now you have to decide how to actually enter the trade.
Do you just blindly enter? If you want to cross the street, do you simply just start walking across? Only if you want to possibly get ran over. Of course, you look both ways first to make sure it’s “safe”. This same approach is also practical with trading. You want to make sure it is “safe” to enter the market (i.e. a high probability trade setup).
The entry technique will help keep you out of trades that aren’t behaving the way you would expect in your potential trade area.
Let’s pretend your potential trade area is where bearish divergence is present. Do you just automatically short? Or do you wait for price to trade near a significant resistance level first? Maybe even wait for an exhaustion reversal candlestick like a shooting star to form?
Instead of waiting….you short now, and then watch price climb higher and get stopped out.
Just because you find a good area to trade doesn’t mean you should just jump right in. A good entry technique provides that solid confirmation to help keep you out of losing trades.
Again, make a screenshot of your chart and label where your entry trigger is.
Don’t forget that you must combine a good entry trigger with a good potential trade area. A moving average crossover may be a popular entry technique but if you don’t factor in the area in which you’re thinking of entering, you will probably be whipsawed to death.
Using an entry trigger as a “stand-alone” technique is a recipe for disaster. Make sure you’re aware of your “surroundings” as well. Don’t bring a knife to a gun fight. Or for you kids out there, don’t bring a tennis racquet to your baseball game.
Trade Management Rules
You need to have a game plan in place BEFORE you even consider getting in the trade. That game plan tells you how you will manage this trade, whether it goes for you or against you.
Entering a trade is the easy part, it’s exiting a trade where you’ll determine whether you make or lose money.
Two traders, Tom and Jerry, could take the same trade but have two totally different outcomes. Tom will make money on the trade because he properly managed his trade and planned an exit for different scenarios.
Even if he loses, he will know when to stop the bleeding and get out with a smaller loss. Jerry on the other hand, does not have a plan in place. He does not know what he is going to do if price goes drastically against him, eventually wiping out his account.
It’s critical to determine how you will manage the trade BEFORE you enter the trade.
You do NOT want to be making critical decisions in the heat of battle.
When you enter a trade, you should have already decided how you will react to every possible outcome.
ry and figure out all the possible variations that could occur and decide BEFOREHAND what you will do. You want to be a cold-hearted, emotionless execution robot when in a trade.
All decisions are made BEFORE a trade. You are proactive. This means you are not yet in the trade! When deciding to enter a trade, you simply refer to what you wrote here. This eliminates any seat-of-the-pants decision making.
If you do take the trade, you already know where your initial stop loss will is placed, where your profit target(s) are, if you will trail your stop, where you might get out of your trade early, etc.
You must have your trade management rules fully planned out ahead of time, BEFORE the trade is initiated.
You NEVER EVER want to be thinking “What do the hell do I do now?”‘ when in a trade.
The time to decide such things is always, always, always BEFORE you ever enter a trade yo. Word?
Keeping A Trading Journal Is Hard But It’s Worth It
Keeping a trading journal is hard.
But so is losing all your trading capital, failing as a forex trader, giving up, never to return to forex trading ever again.
Entering trades in a journal forces you to view the trades in black and white, rather than simply relying on your memory, which for most humans, is a stretch.
More importantly, a trading journal allows a trader to step back and view their trades as a group of trades, and not as individual and ultimately random transactions.
Keeping a trading journal is the equivalent of an athlete’s practice.
It’s not uncommon for a professional athlete to spend far more time practicing or training for an event than actually participating in it.