5 Reasons to Track Your Trades Using a Trading Journal
Part of my improvement process as a Forex trading has been to start tracking every single of my trades with a trading journal. That has resulted in fabulous results and I want to share the main reasons why I can't stop using trading journal and why I believe it is essential to do so. If you want to go further in the process of tracking your trades, I recommend you read How to Use a Trading Journal, an article in which I also share a FREE template.
So here we start with 5 Reasons to Track Your Trades Using a Trading Journal. Feel free to comment below and share as much as you can with people who might be interested.
Validation of your strategy
First, a trading journal will allow you to answer a critical question common to all traders: “Is my strategy working?”. The truth is, if you never know how much money you've made or lost over the course of a couple of months, you cannot really test the effectiveness of your trading strategy. By tracking every movement in your account, you are able to know whether your strategy works on a live trading account managed by a real human, you.
Tracking your progress
In addition to validating your strategy, your trading journal will be the key tool to track your progress. “Have I made a better profit in the last month? Did I trade less in the past month?” Your trading journal will give you the answer. As a personal anecdote, I started tracking every single trade quite late in my trading journey. As a result, I had a hard time noticing improvements in my trading return. However, once I started trading, tracking, and reviewing, I became impatient to see my results every month and I gained a lot of motivation. I make sure that every decision I make will end up improving the profit I see on my trading journal.
After trying both tracking and not tracking, I can tell you that the feeling of seeing a great improvement in your earnings at the end of the month is awesome. In the worst case, if your profit decreased in the last month, you'll be able to find ways to improve in the future. That is why journaling is great. This brings us to the next reason.
Find ways to improve
“What gets measured, gets improved”, used to say my boss although he was quoting Robin S. Sharma. Today, I agree 100% with him. There's no better way to get better than to get tracked carefully at first. Once you see what you've been doing, you can start to brainstorm on ways to change that.
On that topic, let me recommend you The Little Book of Currency Trading: How to Make Big Profits in the World of Forex by Kathy Lien. I read this book a couple of times and was impressed by the amount of information given. In one of the chapters, the author discusses how she discovered some very small details in her trading journal that, when modifying her money management strategy, could result in big income differences. For instance, she used to place all the stop losses at 30 pips from the entry price. She noticed that a very high probability (i.e. 95%) of the trades that went to -20 pips continued until hitting the stop loss at -30 pips. By reducing her stop loss from 30 to 20 pips, she would save a good 10 pips on each losing trade. This resulted in a significant improvement of the overall profit of Kathy Lien's trading account.
There are, of course, many other ways to spot ways to improve by simply looking at your trading at the end of each month. You could be surprised by what you find from your own trades.
Sense of accountability
There is something special with the act of writing down all of your trades and making calculations from them. You develop a sense of discipline and accountability. In other words, you become much more likely to follow your trading rules. To increase the effect, write down the reason for entering the market next to your trade in the journal. You can also add a “comment” section to allow you make statements concerning the trade you took. If you made a mistake, admit it, note it and move on. If the trade was respecting your rules at 100%, congratulate yourself and write it down as well. This will show your brain that trading is serious. Sooner or later, you will try to reduce the number of trades where you commented “This trade didn't respect the rules”. At that point, your profit is likely to sky-rocket.
Lot of interesting stats
This is probably my favourite part. Having studied a lot about statistics and data analysis, I understand the unimaginable number of things you can do when you get the appropriate statistics. By tracking useful elements of your trades, you will able to calculate key statistics that can help you evaluate your trades overall. Some figures that you should calculate are described in the article How to Use a Trading Journal. The good thing is that once you set the formula, the computations are done automatically. Then, it's easy to compare your new key stats with the ones from previous months. Be careful, if a figure decreased in the last month, it doesn't mean that you traded badly. Sometimes, you can't do anything for it. The only possibility is to find an action plan for the following month. It is still interesting, though, to be aware of your performance on several statistics.
Those 5 reasons why you should track your trades using a trading journal are, in my opinion, quite convincing. Not only will you get better at trading, you will also feel better about the whole process. You will increase your confidence in your strategy and it will get easier to enter only the best trades, those that lead great results for the smallest probability of losing.
How to implement this…
I strongly suggest that, if not done already, you challenge yourself to keep track of your trades for the coming week. It really doesn't take much time and you'll have a sense of accomplishment.
If you've successfully implemented a trading journal in your life, comment below and tell us how it helped you. If not, tell us what you plan on doing to track your trades and improve starting today.