One of the most important keys to successful currency trading, especially when starting out, is the correct use of a Forex trading journal. Time and again comments are made by prosperous traders about their use of a trading journal, and about how it helped them hone their trading skills.
However, even with these expert testimonies, novice traders usually do not take advantage of the benefits that a trading journal provides.
When scientists or inventors are working in their labs trying to find the right formula, they take careful notes of everything they do. When athletes are in training they keep records of everything they eat, their exercise, and their training regimen.
Basically, anytime someone is serious about taking on a new learning situation – especially where continual improvement in performance is critical – having a way to journal, track, or record your performance is invaluable.
Why You Should Use Forex Trading Journal
Keeping track of your trading activity is just as important if not more important, as keeping track of any other performance activity that you want excel at. Even more so if you want to make it as a Forex trader, because of the predominantly technical nature of active Forex trading.
A trading journal is the best way for a Forex trader, or any trader for that matter, to analyze themselves, the market, and their trading plan realistically.
A good trading system will help you to know what to do in the market. A Forex trading journal, however, will help you to see how you are really applying the strategies of your system, as well as reasons for why it may, or may not, be working for you.
Timing, personal mood, market mass psychology, news and events, and so many other things play a role in any given trade. Only by recording what is going on at specific moments can you begin to see patterns that can help you to hone your trading skills.
Another great advantage of a using a Forex trading journal is that it allows you to prove to yourself that your trading system works in practice. One of the best ways to improve trading discipline is to increase your faith in your trading system. It should go without saying that knowing for a fact whether or not your system is profitable over the long-term is invaluable.
Tips for Using a Forex Trading Journal
Although there are no hard and fast rules as to what to keep in a Forex trading journal, there are a few things you should track that will ultimately give you a complete picture over time.
o Number your trades, like 1,2,3, etc. so that you can see sequentially how you have been trading. This shows if you improve or decline over time. Keeping them in order will reveal certain pattern criteria that will help you to know where your strengths and weaknesses may be as a trader.
o The date and time can help tell you if a particular day of the week is better or worse for you. The time can be important because the market reacts differently at various points throughout the day. Between 7-10 a.m. EST (GMT -05:00 New York Time) there is an overlap of the London session closing and the New York session opening. This means heavy volume with strong trend signals initially, but quick reversals or stalls as well. In your journal, you would likely notice this pattern and how you can best trade in it, or perhaps you would learn to stay out of the market at that time due to regular poor results.
o Reasons for taking the trade should be listed too. This may say something about set up signals for your strategy, or you may record seeing a candle quickly move and wanting to jump on it. After looking over a number of recordings, your journal may reveal that you are an emotional trader. This can be valuable information for really knowing what motivates you in trading.
o The currency pair of the trade should be recorded. Knowing which pairs your trading strategies work best with is valuable information. All the pairs have their own personalities, and even similar ones, like the GPB/USD and the EUR/USD, have different volumes, pacing, and reactions that can affect how your strategies may work.
o Expectations of the trade should be listed. Are you fully exploiting the edge of your trading system? If you regularly aim for 20 pips and only get 5 pips, you may be in the positive, but you may still not be using your strategy correctly. Recording your goals is the first step in finding out how often you reach them.
o Exit rationale is as equally important as the reasons for entering a trade. It can be really useful to track your exit rationale, especially if you are prone to exiting your trades a little too early.
o Profit and loss should be recorded to determine how successful your trading plan is. For a deeper analysis, you should drill down to see your true profit and loss for each strategy, currency pair, time of day, etc. It is also recommended when recording profit or loss, that it is done in percentages – not a monetary figure. This gives you a better idea of the amount or degree of risk you are engaging in. A dollar amount is subjective to your lot size.
o Room for extra comments is important because you need to be self-aware from moment to moment when trading. Here you may record that you were sick, or got distracted by a phone call while placing a trade. You may also list that you were feeling great and had been sleeping well, exercising, and mentally clearer. All sorts of extraneous things affect your trading, and you need to be aware so you can continue what helps, and change what negatively impact your results.
These are just a few trade tracking suggestions that are good to have in your trading journal. For even more detail, adding elements such as the direction (long or short) of your trades, risk to reward ratio, length of each trade, photos of your setups and exits… can be very enlightening.
Keeping a Forex trading journal is not a magic potion to make you a perfect trader. But if you are serious about your Forex endeavors, and really are looking to make a full-time, successful career out of it, then journaling is truly a must. It is the only thing that can tell you what you have done, so you know how to reset your sails, if necessary, and head in a different, more effective direction.