In previous blog posts, we mentioned the importance of keeping your trading operations organised, and a trading journal can be a useful way of doing just that. But what is a trading journal, and what should you use it to keep track of? Here are some factors you can use a trading journal to document and observe, so you can stay on top of the markets:
Your reward-to-risk ratio compares how much you could stand to profit in a trade with how much you put in to aim for that profit. An investment with a risk-reward ratio of 1:7 suggests that an investor is willing to risk £1 for the possibility of earning £7, while a risk/reward ratio of 1:3 signals that an investor should expect to invest £1, for the prospect of earning £3 on their investment. Keeping a reward-to-risk ratio in mind with your trading, and keeping that ratio in your journal, will help you manage any potential risks that come from trading, and maximise your profit.
This is a fairly straightforward figure, your win percentage is the percentage of your trades that result in profits. By keeping track of your win percentage in a trading journal, you can examine whether your current trading strategies are paying off for you, and potentially identify ways to refine your trading methods.
Keeping an eye on market movements is an essential part of getting ahead in trading, and keeping a trading journal can be a useful way to keep your analysis organised. Depending on your trading style, you should conduct some research into your chosen market before it opens or during the weekends, observing any patterns and making notes to yourself about how to use the information you gather.
Trading is a game of numbers, and your trading journal can help you keep all the statistics and figures straight in your head before you start making trades. Use a spreadsheet software such as Excel to document the times and dates you make your trades, as well as things like stop losses, reward-to-risk ratios and charts on market movements and prices before, during and after your trades. You can use this data to assess your trading decisions, identify any patterns in your chosen markets and keep track of your trading timeline. The figures you should record for each trade include:
- Entry and exit dates and times
- Trade execution and order type
- Trade lengths
- Trade sizes and capital limits
- Stop losses
- Reward-to-risk ratios
- Trade results
- Profits or losses
- Market conditions of the day of trade
- Ratio examinations from profits and successful trades
It is essential to systematically evaluate and assess your trading, and your trading journal can help you to do just that. In your journal, you should write in detail your rationales behind indulging in a particular trade at the very moment, to help you keep track of your thought processes. It can be a signal, a hunch or some other market information, but these thoughts are important to document as soon as you have them. Organising your thoughts in this way can help you notice any trends in your trading decisions, and could help you avoid any particular mental weaknesses on your part for trades going forward.
Strengths and weaknesses
In a similar vein, once you’ve recorded enough information about your trading activities in your journal, you can use that information to identify your strengths and weaknesses. These can be in your trading style, the financial instruments you choose to invest in or the thoughts that motivate you to trade in particular ways- by documenting your trading activity comprehensively through your journal, you can take steps to refine and improve your trading process. You can use the data you get about your trading habits from your trading journal in conjunction with other money management techniques and mental exercises to help develop a healthier and more profitable attitude to trading.