Introduction

Journaling our trades or in rudimentary terms, record-keeping is simply recording the trades with different set of values but it is not as simple as that. Now, I can hear some voices – ‘What is the big deal about journaling my trades? I have the best method in the world which is raking in 10% profits per week and so, I don’t need them” Fair enough. Happy for you!!

But, for regular traders (who do this for a living), a trading journal is probably the most important tool a trader needs to possess in order to trade the markets profitably. Proper record keeping can tell us what we have been doing right, what needs to improve and help find patterns in our method/behavior.

Maintaining a trading journal might sound unpretentious but even getting started, is an arduous task. First of all, most of the wannabe traders do not journal their trades. There is a strong reason for that behavior. If we keep a journal, then we will be forced to take responsibilities for our actions in trading rather than blaming the market, blaming others (eg: market makers, software glitches, hot social media guru, TV analyst), wife, neighbor’s dog and myriad number of illogical reasons. Records keep us honest and remember, numbers don’t lie !!

Key aspects of a trading journal

It is absolutely astonishing to know the kind of information traders can get from their journals if they include basic statistics about their performance. Trading predispositions that escape normal notice suddenly stand out when summarized statistically. With statistics, we can not only say that a trader made improvement, but can actually measure that improvement and track it over time. Such statistics capture improvements that will eventually show up in the profit/loss statement, but it may not be evident straightaway.

1. Observation about us and markets – It should have observations about us/our trading and about the markets themselves. I have found that trader journals usually are lop-sided toward self-analysis and include little in the way of market observation. When I began as a trader, I printed out daily charts of each day’s action and wrote comments on these, pointing out the patterns that I wanted to watch for in the future. After some time, this identification of pattern became automatic and it became easy to trigger that trade next time.

2. Observations about our best trades must be included – Many traders use the journal as a means of self-criticism or a venting out mechanism, and they only journal when they’re having problems in the market. Additionally, it should also tell our best trades so that we can focus on them more.

3. Journal should outline specific steps for improvement – It is not enough to write ambiguous generalities, such as ‘I need to hold my winners longer’ or ‘I need to be more disciplined’. Identifying specific steps we will take to hold onto winners (proper setting of trailing stops (if any), self-control strategies, etc.) or maintaining discipline (risk management, taking breaks, etc.) makes the journal a game plan for the next day/week/month. Such review is an essential step in the kind of continuous improvement that marks winners across all disciplines.

4. Net points and Average point in losing trade/winning trade (Risk:Reward) – self explanatory metric

5. Number of winning and losing trades

6. Winning ratio – this is one of the most beaten down parameter to lure newcomers into trading workshops/services and many others. This parameter is of no use if we don’t see it along with Average Risk:Average reward. A system with 30% winning ratio and 1:7 RR is much more superior (w.r.t risk adjusted returns) than a system with 75% winning ratio with 1:1.5 RR

7. Number of long and short trades – Some people are so smooth in taking short trades but they have hard time taking longs. This is a real problem for lot of newbies.

8. Time holding losing trades versus winners – It is very hard to make money over time by holding onto losers. Eventually, the size of the losers becomes greater than the winners so that even a trader who has more winning trades than losers can end up in the red.

9. Profit/Loss broken down by long and short trades and in-turn, broken down by market condition. This is particularly useful for discretionary traders. It tells them if they trade ranges better than breakout movements. If a trader’s performance is ominously worse in one mode than another, then it is time to start probing their trading for needed improvements.

10. Drawdown percentage (both average and maximum)– to identify the drawdown and see if it matches with the system’s expectations

11. Tracking emotions before/during and after the trade – Jotting down our emotions when we enter the trade, when the trade starts going in our favor/against us, stop outs and profit tgts(if any)…we will feel very different emotions in each of these stages. Identifying them (being aware) is the first step to understanding it. Over a period of time, the emotion patterns starts to repeat and we can really work on them.

12. It should have ‘entry note’, ‘exit notes’ and ‘what would i do differently’ columns for every trade taken.

13. It should have provision to subtract the commission+other taxes we pay irrespective of winner or loser.

14. Equity curve – nice equity curve graph is a must and a breakdown of monthly/quarterly points/returns in a pivot table

Probable learning out of a trading journal

When we see the metrics, we could see where we can work on (few areas of improvement) –

1. Holding onto losing trades as long or longer than winners – so, jotting down the time in a losing trade/winning trade helps here (Point # 8 of previous topic)

2. Significantly different profitability during morning vs. afternoon trading hours – this is applicable more to intraday traders. Many a times, fatigue can make an intraday trader go below his desired potential.

3. Different profitability during different market conditions, such as trending markets or volatile ones – there are 4 kinds of markets trending volatile, trending non-volatile, rangebound volatile and rangebound non-volatile

4. The tendency to give back the points of many profitable trades in a few large losing ones – this is the biggest sin a trader can make while formulating a system. Small losses/small profits/large profits are all OK but large loss is never OK for various number of reasons.

5. The trades and their distribution/sequence can teach us a very important lesson – not only markets and volatility are cyclical in nature, even returns are cyclical in nature. A stellar year can be followed with a lackluster year and the 3rd year could be an above-average year. This kind of understanding would give us the conviction to stick to the plan every single day.

Final thoughts

More than a tool, journal can be a great friend to a trader – they can remind us of what we’re meant to be doing. They are a way of focusing on process, rather than anchoring our moods and self-esteem to the ups and downs of P/L.

In the end, trading journal can be thought of as an exercise equipment – they only produce results if you work them regularly. So, let us start journaling our trades the right way and at the end of the day, let us be better traders. Atleast, we owe it to ourselves that much !!