A trading diary is a place to record your trades, your thoughts and your results. A well structured trading diary is essential to your development as a trader. The diary allows you to first of all identify areas for improvement, then set goals to improve and review your progress. If your trading diary is blank, then there will not be much to learn. And if it is full of swear words and put downs, you will not enjoy reading it. This is an essential tool for your development and learning. The most important trading book you will ever read is your own trading diary.
Start your trading diary before you start to trade. When you are new to the markets it is a good idea to study a range of markets, time frames and trading techniques to find one that you would like to trade. This may be intraday trading, end of day trading or even longer term; it could be commodities, indices or shares. There is no right answer as there is no perfect trading strategy. It is essential to find what works for you.
A trading diary may initially only include market observations, what happens when a set of circumstances arise. By observing what happens if the market is down heavily or what happens at a change in trend you can learn to identify trading opportunities as these unfold in the future. This is an essential part of the learning process before you start trading and can be used to develop your analysis skills. From historical research you can identify opportunities that may exist, and following these in real time allows you to build the recognition and the confidence to trade them.
Creating your diary
To be an effective learning tool a trading diary must include the following components to create a positive feedback loop. Start with your objectives and the opportunities that exist in the market for today. Next record the trades that you complete, taking into consideration market conditions, your own feelings and the outcome of the trades, and then review your trades at the end of the day or week, and rate your performance. This review is where you can identify areas which you still have to work on.
Set yourself a goal that will make today successful regardless of how much you make. Trading successfully is not about making money every day – it comes from gradual improvement over time.
During the day record the activity that you undertake. This includes what is happening in the market, how you act on that and the outcome of the action. By recording any emotions here you can also get a handle on what emotions are affecting your trading. Monitoring your levels of confidence and anxiety is one way to monitor your level of fear and greed.
Review your performance at the end of the day to identify how well you did. It is possible to make a lot of money when you trade badly, but if you continue to trade badly you are very likely to give the money back. Note areas of weakness in your trading to work on in the future.
Without objectives, you do not know if you are achieving your goals or not. The goal to make as much money as possible is not a useful goal to set. Make goals concrete and measurable. Process-oriented goals work much better when trading than financial objectives.
The goal “I want to make $500 per day” is a goal over which you have no control. The market you are trading today may not provide the opportunities, yet on another day you may make $2,000. Never attempt to control the market or make it conform to your ideals, instead focus on what you can control.
As an example you could set a goal to take entry signals within 2 points of your signal. It could be to place a stop order every time you enter a trade or to limit your trading size to ensure you risk $100. These goals are now within your control and you can have a successful day in the market, even if you do not make money.
It takes time and repetition to internalise a new habit, so make sure you repeat the goal on a regular basis. An athlete will work on developing strength for a period of time and then speed, then endurance as another part of their training program. A trader will work on analysis for a period of time, then correctly sizing positions, then taking profits until the trader develops all the core skills required to trade successfully.
What did I do today?
Keeping track of your trades is important, but more than that it is important to record other information that helps you to improve your trades. Buy at $10.56 and sell at $11.24 tells you very little about what was happening when you entered the trade. What was going on in the market? Which setup was in place for you to take the trade? How were you feeling when you entered the trade? Once you are in the position, did the market conditions continue to support the trade? What signs made you decide to hold and which exit did you use to get out? If you build up a record like this it is much easier to identify patterns that may occur when you are trading. You can then eliminate behaviours that are affecting your trading.
You will start to understand the impact of emotions on your trading, after you have traded for a while. It is important not to get involved in the market, but remain detached and observe how the market is moving. In this way you can act on what you can see, not react emotionally. By recording your emotions in your trading diary you can increase the speed at which you identify problem areas.
How can I improve?
Reviewing your trading diary will help you identify areas where you can improve your trading. If your win % is low, then look to improve your analysis and entry techniques and if your risk reward is small then take a look at your stops and profit taking exits. In addition to this a strong risk reward provides you with an opportunity to improve your scaling in to maximise your returns from the good trades when they come along.
With your daily review, study your losing trades in particular. You are more likely to learn from these and you can aim to eliminate them, through better analysis, or minimise them through better risk management.
Like any successful person the drive to continually improve, to be a little better each day, makes the difference between a good trader and a great trader.
Regardless of whether you win or lose, every trade you make is a step forward in your trading journey. By pursuing process oriented goals you control your development. Incorporating these goals into a feedback loop that allows you to assess how well you met your objectives each day will put you on the path to improving your trading with every trade that you make.
By Jeff Cartridge