Journaling isn’t just for silly, infatuated high school girls. Believe us. The most hardcore traders out there have journals too!
Why You Need A Forex Trading Journal
You need to keep a trading journal.
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.
That information provides NO help to your next trade. Zero. Zilch. Nein. Nada.
A 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.
Not everyone gets their Master’s degree or PhD in mathematics, computer science, financial engineering, or whatever, then moves on to a big financial institution or a proprietary trading firm.
We’re all “average Joes” learning from home or where ever we can find an internet connection. This means we learn how to trade ALL from scratch and develop our own methods. Thankfully, because of the internet we can learn and connect with other like-minded individuals, both new and experienced, to shorten that learning curve.
Even so, most of us lack access to that crucial asset to learning any task or skill quickly and efficiently: a coach or mentor.
A coach or mentor is there to guide you every step of the way, pointing out your mistakes, recognizing the things that went well, and keeping you disciplined and accountable for your performance.
A mentor of any caliber is hard to come by for most new traders, so we have to the next best thing: mentoring yourself with a trading journal.
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 and stop watching “Keeping Up with the Kardashians.”
Also, how disciplined you are with your trading journal will be a great predictor of your overall forex trading success down the road.
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.
What to Write Down In Your Trade Journal
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. Like Shakira’s hips, the numbers don’t lie. And sometimes a shot of reality can give you the kick in the butt you need to kick up your game!
Truth be told, this sounds like a lot. So to make it easier for you to get started, here are what we feel are the bare minimum. Our “must-have” elements of a trading journal.
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.
The Bare Minimum: 5 Things You Must Keep In Your Trading Journal
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. Just like your custom Dota 2 character, you should customize your trading journal as you see fit.
Remember, you are the one who’s going to benefit from writing a forex trading journal. So write down what you think you would benefit the most from!
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? Where are you looking to pull the trigger?
This area is determined by whatever setup detection method you have written in your Trading Plan. An example might be the crossover of two moving averages or price hitting resistance on a Fibonacci retracement level.
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.”
This will keep you from entering a trade without a plan and shooting from the hip.
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.
How big should your position be?
This is the easy one. You must decide, based on your risk management rules in your forex trading plan, what your position size will be.
This allows you to know your maximum risk.
How much are you willing to risk per trade?
Or are you going to bet the farm?!!!!! Yeah that’s right. Do it. Bet the farm.
Don’t bet the farm!
Haven’t you been paying attention?
You want to become a trader, not a gambler!
And unless you’re really a farmer, you probably don’t even own a farm anyway. Position sizing is important because it helps your account stay healthy and ready for the next opportunity.
It important to take note of how big or small you are trading. By keeping track of position size in your journal, you can see whether you are comfortable trading large position sizes.
Or if you prefer smaller lot sizes while using wider stops.
Luckily for you, the FX-Men have decided to give you guys a gift!.
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.
Be Like Tom
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.
Try and figure out all the possible variations that could occur and decide BEFOREHAND what you will do.
Be Like Spock
You want to be a cold-hearted, emotionless execution robot when in a trade.
You want to be like Spock but without his human side. You want to be a Vulcan trader.
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.
Be Like Keanu Reeves
Pretend you’re Keanu Reeves.
If you were to be given a pop quiz at any point in time during the trade, and are asked, “What if price does this or that? What if price goes here or there?”
“What do you do? What do you do?!”
You should be able to answer in a snap without thinking, for every single trade, every single time.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?
Being retrospective means to take a look back at events that already have taken place.
Once you’ve finished trading, it might be tempting to call up yo homies to hit up happy hour, kick back shots of Patrón, and splurge on bottles of Dom Pérignon, but it’s crucial that you review how your trade went, win or lose. You want to look back over the whole process to understand what you did right and wrong. Here are some questions to ask yourself:
How well did your trade work out?
- Was the position size sufficient to match the risk and reward scenarios, or was it too large? Too small?
- Could you have entered at a better level?
- What tools might you have used to improve your entry timing?
- Were you patient enough or did you rush in thinking you’d never have a chance again?
- Was your take profit realistic or a pie in the sky?
- Did the market pay any respect to your choice of take-profit levels, such as stopping short of it, or did prices blow right through it?
- Did the market pay any respect to your choice of stop-loss levels, such as stopping short of it, or did prices blow right through it?
- What news or event catalysts caused the market to move the way it did?
Use the answers to refine your position size, entry level, and order placement going forward.
How well did you manage the trade after it was open?
- Were you able to effectively monitor the market while your trade was active? If so, how? If not, why not? The answers to these questions will reveal a lot about how much time and dedication you’re able to devote to your trading.
- Did you modify your trade plan along the way?
- Did you adjust your stop loss order to protect profits?
- Did you take partial profit at all?
- Did you close out your trade based on your trading plan, or did the market surprise you somehow?
Based on your answers, you’ll learn what role your emotions may have played and how disciplined a trader you are.
While you may want to vent your thoughts, emotions, and feeling to yo homies, it’s better to write them down here.
You are probably boring them to death anyway. They don’t want to hear your whining.
What can you improve and what specific steps will you take for improvement?
This is your opportunity for trader self-improvement.
Do not just write vague confessions like “I need to hold my winners longer” or “I need to cut my losses quicker” or “I need to be more disciplined”. These are totally useless by themselves.
Identify SPECIFIC steps that you will take to improve.
- How will hold your winners longer?
- Will you work on choosing better profit target?
- Will you learn how to not freak out at the first sign of your unrealized profits falling?
There are no right or wrong answers in this review process.
Just be as honest with yourself as you can be.
And be SPECIFIC.
Otherwise, you won’t improve as a forex trader.
Did you execute your trade according to your trading plan?
DO NOT TAKE THIS QUESTION LIGHTLY.
If you are not routinely executing trades according to your plan, then you either have a serious problem with self‐discipline or there is a problem with your Trading Plan.
Either way, you have a BIG problem that needs to be fixed yesterday!
Trading Performance Statistics
While your bottom line (total profit or loss) can easily tell you your overall trading performance, keeping statistics is a great way to find out what parts of your trading system are keeping you from running like a finely tuned race car instead of a junkyard clunker.
Your “performance stats” help you determine what’s working, what’s not working, and what to improve on. Here are some of the statistics to keep, at a minimum, to track your system vitals.
Your net profit is your total gain minus losses and expenses. These expenses include the cost of equipment, commissions, and other costs. Basically, this is how much your account is up or down at any given time minus to costs to trade.
Win percentage is the total number of wins divided by the total number of trades. What percent of the time do you win trades?
Loss percentage is the total number of losses divided by the total number of trades. What percent of the time do you lose trades?
Largest Winning Trade
Your largest winning trade will be removed from your “average win” calculation. This is not necessary to do, but if you do have an abnormally large win in relation to your other wins, then taking it out will provide a more accurate look and expectations to your stats.
Largest Losing Trade
Your largest losing trade will be removed from your “average loss” calculation.
This is not necessary to do, but if you do have an abnormally large loss in relation to your other losses, then taking it out will provide a more accurate look and expectations to your stats.
Average Winning Trade
The average gain per winning trade is computed by dividing the total gain from all your winning trades divided by the number of winning trades.
Average Losing Trade
The average loss per losing trade is your total loss from all your losing trades divided by the total number of losing trades.
Payoff Ratio per Trade
The payoff ratio per trade is your average winning trade minus your average losing trade.
Average Holding Time per Trade
The average holding time per trade is calculated by dividing your total holding time for all your trades by the number of trades.
P/L of Long Trades vs P/L of Short Trades
This stat helps determine what types of trades or trading environments you perform well in.
Largest # of Consecutive Losses
This stat helps in determining your max drawdown, or the worse possible scenario you have experienced so far.
Average # of Consecutive Losses
This stat helps in determining your average drawdown and controlling your potential max risk.
The maximum drawdown is the worst period of “peak to valley’” performance of your trading system.
In simple terms, expectancy is the average amount you can expect to win (or lose) per trade.
This can be computed by multiplying the loss percentage by the average loss and subtracting it from the win percentage times the average win. This stat helps you determine the correct position size and how profitable your trading method is.
Tracking Feelings and Mistakes
Your mental state can’t exactly be tracked as a “statistic” but you should record it nonetheless.
Keeping track of how you feel will help you avoid trading during those frustrating times–like when you wake up right after a news event (that you forgot about), and it pushes the markets fast, so you try to chase it.
But then your computer crashes, you lose power, and your dog goes running out of the house into oncoming traffic.
By the time you get back online you see the market has moved 100 pips in the direction you wanted to buy. Don’t you hate it when that happens?
You’re probably not in a good mood by then, so trading for the rest of the day may be a bad idea.
Ideally, you should be keeping track of these statistics so that you can compare and analyze your performance over a set period of time. For example, at the end of the year, Huck releases her year-end trading review.
After going through her trades, she could see that she was actually unknowingly taking trades against the trend!
Knowing this, she can adjust her trading so that she can avoid going against the trend and this will hopefully lead to better trading performance.
The goal of collecting and calculating these stats should be to find ways to maximize your expectancy (pips or dollars gained per trade), set the correct position size per trade, and determine the trading conditions best suited for YOU!
Reviewing Your Trading Journal
After a good number of trades, you will have collected a lot of fancy-schmancy data and observations on the market and yourself…how do you analyze it all??
It’s pretty simple:
- Find what works and keep doing it
- Find out what doesn’t work and stop doing it.
And finding what works and doesn’t work is all about keen observation and asking the right questions. Refine your analysis of your trading results by breaking them down into smaller categories, such as day of the week or specific currency pairs.
Here’s a sample of the types of questions you should be asking yourself when you review your journal:
- Which chart patterns or technical indicators work out best for you? Which do not?
- How can you adjust your indicators to get you in trades earlier, or help you avoid whipsaws and fakeouts?
- Are you closing winning trades too early? Is it that you need to adjust your profit targets or are you afraid of losing your unrealized gains?
- Do you hold onto losing trades longer than you should? How can you improve your stop-loss processes?
- How often do you follow your trading plans? Of the ones you do follow, have you been profitable?
- What trade setup did you miss, or not take, and why? Was it a legitimate signal or setup according to my method or system?
- What could you have done differently to make prevent/reduce this loss or maximize your gain?
- Are you winning more on trades with multiple lots or single lots?
- What kind of market environments have you been doing well in? Trending or ranging?
- Were most of your wins or losses biased towards certain currency pairs?
- Which news events have brought on the kind of volatility you were looking to trade or avoid?
- Which trading sessions have been the most favorable to your trading style?
- Are you losing trades concentrated on certain days of the week, such as Mondays and Fridays?
Questions like these can help you quickly filter out the actions that have kept you from making some pips. In the beginning, the idea is to get to the point where you have figured out what works for you and to only do those things.
Once you have figured out those right things, the next step is to consistently practice those actions that work until it becomes a habit.
Finally, persistent journal will help keep you on top of your performance and help you recognize when the markets change–and yes the markets are always changing.
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.
And reminiscing about the good ‘ol simpler days of being happy when there were only five TV channels to choose from.
Which would you rather choose? 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.
Boy, this sounds like a lot of work, doesn’t it?
Heck ya it is, but doesn’t anything worth achieving require work?!?
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. According to Tim Grover, Michael Jordan’s personal physical trainer:
“Michael would go for 40 or 50 points one night, and the next morning he was right back at it in practice. He just couldn’t take a day off. His mental toughness was unbelievable, but the reason was that he was so physically ready every day. He used to have a saying, ‘I practice so hard because that makes the games easy for me.’”
John Wooden, winner of a record 10 NCAA Men’s Basketball Championships, and known as one the greatest minds basketball has ever known, ran a very strict and disciplined two-hour practice, 5 days a week, in preparation for a 40-minute basketball game.
You know who much time that is? That’s 10 hours (or 600 minutes) of practice for 40 minutes of the real thing.
And that’s not all! Not only did he stress meticulous and deliberate practice, he kept a LOG of how every practice went.
Coach Wooden would refer to his practice logs if his team had a problem he couldn’t solve. For example, if his current team was shooting poorly, he would research his old practice logs to determine how they could improve their shooting.
Even in the days of no computers or iPads, Coach Wooden understood the importance of strict record keeping!
While the act of journaling really isn’t that hard, it is a time-intensive process will require consistent effort.
Summary: Keeping a Trade Journal
Your trade journal is a log of all trading activity.
A trading journal provides any serious trader who wishes to make money a tool to help them evaluate themselves objectively. There are three elements for sustained successful trading:
- Having and executing a good trading PLAN.
- Having a good trading system as part of that plan.
- Review and improve your trading performance and plans.
Every forex trader should maintain a journal that focuses on these elements. This journal’s objective is to monitor both the performance of your trading system AND your ability to execute it with consistency.
Poor trading systems are less frequently the cause of poor trading performance than the inability of the trader to properly follow the rules of the trading system.
That’s following the Trading Plan. Your trading journal is intended to make sure you do just that.
Journals are only as good as what is written in them. If one fails to accurately track trades, it becomes hard to judge trading performance.
This should be ongoing efforts, not just a one-off for the sake of completing an assignment.
Be thorough and honest. Do not short-change YOURSELF by failing to put in entries or through incompleteness.
Learning to write and maintain a trading journal will build discipline in you.
Not only that, when you reflect on your entries after a month of trading, we guarantee you will learn a lot about yourself and your trading psychology. You’ll clearly see what you’re good at, what you suck at, and what the best way it is for YOU to trade.
This is something that no mentor, no book, no video, no seminar can teach you. You have to experience it yourself. Only through this experience will you become a successful trader.
To build the skill of trading, you must have the will to maintain a trading journal.
Here’s some final advice to keeping a helpful trading journal:
- Always begin the journal before the trade, and end it after the trade.
- Write down everything. Don’t leave anything out. Be honest. If you decided to play Call of Duty while you were in a trade and forgot to exit your trade, write that down, and explain why.
- Pay very close attention to your emotions. Then make sure you write them down.
- Make sure the journal includes observations about you and your trading and about the forex market. We’ve found that trading journals are usually skewed toward self-analysis and include little in the way of market observation.
- Take a screenshot of intraday charts of each day’s action and write comments on them. Make note of patterns that you are watching
- After a couple of months, you will start to see the patterns emerging in real time.
- A trading journal is a learning tool and a great mechanism for training your eye to see the setups you want to be trading.
- Nothing is too silly to record inside your journal. Write it down. Write down whether you missed a trade because you were watching the latest episode of Game of Thrones or playing Call of Duty or you were busy talking to your sweetheart. Write it all down!
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- Warren Buffett
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