A bodybuilder has a journal to track his diet, weight, and strength.
A scientist has a journal to track their latest findings and the results of experiments.
A chess master has a journal to record down his plays and his thought process of the game.
And itâ€™s the same for trading!
But hereâ€™s the thingâ€¦
Most traders donâ€™t have a trading journal or donâ€™t even know what it is.
Perhaps you donâ€™t know how to create a trading journal.
Perhaps you donâ€™t know the importance of it.
Perhaps you donâ€™t know what to write in it.
Well, no worries.
Because in this post, I will explain to you (step by step) on how to create a trading journal.
And by the end of it, youâ€™ll have what it takes to find an edge in the markets so you can become a consistently profitable trader.
Then letâ€™s rollâ€¦
What is a trading journal and why you need one
Your trading journal is like a â€œdiaryâ€ that records your trading activity.
If you ask me, a trading journal is a deciding factor of whether youâ€™ll be a consistently profitable trader â€” or loser.
A trading journal helps you identify your strength and weakness
Hereâ€™s the truth:
No one is a perfect trader, it doesnâ€™t exist.
Instead, you must play to your strengths and prevent your weakness from jeopardizing your trading account.
Take me for example:
I used to lurk around forums and look for the latest trading strategies. Or, Iâ€™ll read a new trading book and see what trading systems it offers.
Obviously, I enjoy learning new trading strategies. But unknowinglyâ€¦
…it cost me BIG TIME.
Because I didnâ€™t know what worked, my results were inconsistent, and I didnâ€™t how to progress forward.
Thatâ€™s my weakness… hopping from one system to the next because â€œit feels rightâ€.
But how did I realize my mistake?
Because I had a trading journal and I realized my trading setups were always different.
And thatâ€™s the problem. I couldnâ€™t pinpoint what worked and what didnâ€™t because my strategies were always changing!
But thank god I â€œwoke upâ€ from my mistake and I lived to tell you about itâ€¦
A trading journal helps you find an edge in the markets
One of the biggest takeaways I had in trading is thisâ€¦
If you want to be a consistently profitable trader, then you must have a consistent set of actions.
Now, it doesnâ€™t mean if youâ€™re consistent in your actions, youâ€™re guaranteed to be a profitable trader.
Because you might not have an edge in the markets. And your consistent actions lead to consistent losses.
But hereâ€™s the deal:
If you have a trading journal, you can look back at your past trades and identify which patterns are costing you money â€” and stop trading it.
Then, focus on the ones that are the most profitable for youâ€¦ and youâ€˜ll find your edge in the markets.
How to create your trading journal (before the trade)
The way most traders create their trading journal is to write down their entries, exits, profit & loss, and etc.
However, itâ€™s not enough because it doesnâ€™t dig deep into the factors that AFFECT your trading performance (like your emotions, your analysis of the markets, and etc.).
Thatâ€™s why your trading journal should be split into 3 parts â€” before, during, and after the trade.
Only then youâ€™ll get a full picture of the factors that drive your trading performance.
Now youâ€™re probably wondering:
â€œWhat do I put in my trading journal before the trade?â€
Your analysis of the markets and the setup youâ€™re looking for
You might be wondering:
â€œWhatâ€™s the purpose of it?â€
So hereâ€™s the thing:
If you donâ€™t write down your thoughts or prepare yourself ahead of the markets, youâ€™ll find yourself missing obvious trading setups (which look obvious in hindsight).
So, by doing this, you will miss lesser trading opportunities and make more money.
Depending on your trading approach, you should do your analysis before the market opens or during the weekends (if youâ€™re a longer-term trader).
Hereâ€™s an example:
If thereâ€™s a pullback towards the 50 MA, then Iâ€™m looking for a bullish candlestick pattern to get long.
My stop loss will be 1 ATR below the swing low with target profit just below the swing high.
Note: Your trading setup must be aligned with your trading plan. If you take any setup outside of your trading plan, then youâ€™re not trading, but gambling!
A quick overview of potential trading setups
Now, if youâ€™ve done your homework, youâ€™d realized your trading journal can get lengthy (especially if you trade more than 20 markets).
What you can do is summarize your analysis of the markets and the trading setups into a few words.
This means at a glance, you can quickly identify the potential trading setups that are about to happen.
Hereâ€™s how you can do it:
- Divide your trading setups into its respective categories
- Write the setups and the timeframe of it
And if you want more details on your setups, just refer to the trading journal you created.
Does it make sense?
Good. Then letâ€™s move onâ€¦
How to create your trading journal (during and after the trade)
Hereâ€™s what you need to record during and after the trade:
- Relevant metrics
- Charts of your trade
Let me explainâ€¦
The relevant metrics for your trading journal
Date â€“ Date you entered your trade
Time Frame â€“ Time frame you entered on
Setup â€“ Trading setup that triggers your entry
Market â€“ Markets youâ€™re trading
Lot size â€“ Size of your position
Long/Short â€“ Direction of your trade
Price in â€“ Price you entered
Price out â€“ Price you exited
Stop loss â€“ Price where youâ€™ll exit when youâ€™re wrong
Profit & Loss in $ â€“ Profit or loss from this trade
Initial risk in $ â€“ Nominal amount youâ€™re risking
R â€“ Your initial risk on the trade, in terms of R. If you made two times your risk, you made 2R.
An example below:
The charts of your trade
At this stage, youâ€™d want to save the charts of your trades.
Higher timeframe chart
This tells you where you are in the â€œbig pictureâ€ and to identify key Support & Resistance areas.
Entry timeframe chart
This is the chart of your trading setup. Youâ€™ll want to state your setup, mark down your entry level and stop loss on it (I use green and red respectively).
Chart when the trade is over
This is the chart after the trade is over. You want to state the end of result of the trade with the R multiple gained/loss.
Hereâ€™s an exampleâ€¦
Higher timeframe chart:
Entry timeframe chart:
Chart when the trade is over:
And thatâ€™s all to it.
In the next section, youâ€™ll learn how to use your trading journal to find an edge in the markets.
How to review your trading journal and find your edge in the markets
This is where the magic happens!
If you had consistently updated your trading journal, you can now review it and improve your trading results.
- Identify patterns that lead to your losses
- Identify patterns that lead to your winners
- Find ways to minimize your losses
- Find ways to maximize your gains
Let me explainâ€¦
1. Identify patterns that lead to your losses
Hereâ€™s the thing:
Among the different trading setups, there might be some which are causing you to lose consistently.
So, look through your trading journal and identify the worst performing setup â€” and stop trading it.
This simple adjustment will reduce your losses and ultimately increase your net profits.
2. Identify patterns that lead to your winners
Next, youâ€™d want to identify your best trading setups. These are the ones that bring in the dough consistently.
So, look through your trading journal and identify the best performing setup â€” and focus on it.
If you want to find more trading opportunities, trade more markets, trade a new timeframe, or both.
3. Find ways to minimize your losses
Now, letâ€™s take things a step further.
After youâ€™ve identified your best trading setups, youâ€™ll still have losers on it.
So, look through the losers of your best trading setups and ask yourselfâ€¦
â€œHow can I minimize my losses?â€
Perhaps you can cut your losses earlier.
Perhaps you can use a filter that reduces your losses.
Perhaps you can avoid trading certain time of the day (or week).
4. Find ways to maximize your gains
Do you want to take your trading up another level?
Then you must learn how to maximize your gains.
Look through your best trading setups and ask yourselfâ€¦
â€œHow can I maximize my profits on these trades?â€
For example, you canâ€¦
- Scale out a portion of your trade and let the remaining run
- Identify patterns that lead to monster winners and trail your stops on it
- Think on your own two feet and figure something that works for you
If you can do these 4 things, then youâ€™re close to becoming the best trader you can be.
Can you see the power of having a trading journal?
Free tools you can use to create your trading journal
Now, here are some tools you can consider using to help create your trading journalâ€¦
This is a free word processing tool by Google. You can use it to write down your thoughts and analysis of the markets.
This is a free spreadsheet by Google. You can use it to record down the relevant metrics of your trading journal.
The good thing about using Google is you can save it to the cloud so you donâ€™t have to worry about losing your information.
This is a free image editing tool by Microsoft. You can use it to edit your charts and add any annotations if needed.
This is paid screen capture tool by Techsmith. You can use it to save your charts, edit your images, and annotate with ease.
Bonus tip: Look out for brokers with this special feature
Now before you scramble to get everything in place for your trading journalâ€¦
Check if your brokerâ€™s trading platform has an integrated trading journal.
Itâ€™ll contain the full details of your trading history.
So all youâ€™ll need to do is to just:
- Take a screenshot of your trades before and after entry â€“ so youâ€™ll have a visual reference
- Write down the trading setups of the trades â€“ to reflect on your thought process
And one more thing I want to share is this:
Some brokers have an in-built performance tracker that comes with your trading history.
Thatâ€™s where youâ€™ll get to see:
- Your win rate & risk to reward at a glance
- Your best and worst-performing instruments
- Your performance based on trade duration
- Interesting stats like the best months, days of the week or even time to trade according to your trading history
That pretty much saves you all the trouble, isnâ€™t it?
Frequently asked questions
#1: Hey Rayner, isnâ€™t it time-consuming to capture screenshots and reasons for my trades if Iâ€™m a scalper? Is a trading journal more suitable for swing trading or long term trading instead?
Yes, I agree, a trading journal is more suitable for traders who are trading on the higher timeframes like the 15-minute timeframe and above.
For scalpers, you could record key metrics like your trading setups, your P&L for the day, and how you were feeling during your trading session.
#2: Hey Rayner, are there any apps or software that you currently use to jot down your trades?
I pretty much use Excel to jot down my trades.
You must have a trading journal because it helps you find your edge, identify your strength & weakness, and improve your trading results.
A trading journal can be split into 3 parts: before, during, and after the trade.
Before the trade: This is where you analyze the markets for potential trading setups so you donâ€™t miss trading opportunities.
During and after the trade: This is where you record the relevant data so you can review them and find ways to improve on it.
Now, if you can do this consistently, your trading results will get better. And before you know it, you are already a consistently profitable trader.
Now before I end this post, hereâ€™s a question for youâ€¦
What do you write in your trading journal?
Leave a comment below and let me know your thoughts.
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