One of the most crucial mistakes traders make when they begin trading the forex markets is not keeping a trading journal.
A trading journal is a way for you to keep track of all the trades you have placed along with the reasons as to why you have taken the trades and what occurred during the time you had the trade open.
This can be a source of huge information !
Over the course of many trades you’ll be able to find out the things you are consistently doing wrong that are causing you to lose money, for example, if you keep closing trades to early, you’ll be able to identify why you’re doing this by analyzing all the previous trades you’ve taken.
A trader who fails to keep a record of all the trades they’ve placed is putting themselves at risk of making the same mistakes over and over again, if you don’t know why your taking trades and what decisions your making during the time you have trades open, it’s going to be impossible for you to figure out what you’re doing wrong.
By keeping a record of all the trades you have placed you’ll be able to fine tune your trading strategy.
Looking at the successful trades you’ve made will allow you to determine which market conditions were present that lead you to take the trade, when you get round to comparing your winning trades with the losers you’ll notice patterns of mistakes your making. For example, you may find from your journal on winning trades you end up taking profits too early, had you let your trades run a little longer you would have made alot more money ! By knowing this information you can make a new rule in your trading plan that will tell you to hold trades for a longer length of time, thus allowing you to make more money.
You can only find these things out if you have a large sample size of trades, if you’ve only placed ten trades it’s not statistically significant enough for you to begin changing things in your trading plan, a sample size of 100 trades or more is needed. Of course the sample size you’ll need differs depending on which time-frame you take trades off, if you primarily trade the daily chart the amount of trades you’ll be taking will be far less than if your were only trading the 1 hour chart, this means you will need a lower sample size of trades in order to begin changing rules in your plan.
Essentially what your really doing is testing how viable your trading plan is, by noting down what you could have done differently on winning and losing trades you’ll be able to create new rules for your trading plan which will allow you to make better decisions, this could be anything like “only taking profits when the market makes a new swing high” or “if the market hasn’t moved x amount of pips away from my entry within 10 minutes close the trade” these are the kinds of things you can discover by keeping a trading diary.
Record You Thinking
Market Douglas has this to say about trading psychology.
“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.”
The four fears Mark defines above all come from your thinking, these are not errors in your market analysis carried out before or after taking a trade, If most of the errors your likely to make come from your thinking then a trading journal can help you understand where you are going wrong when trading.
One of the problems I use to have when trading was not taking trades which met the criteria of my trading plan.
There have been many times the trades I talked myself out of taking turned out to be winners and the ones I took without hesitation turned out to be losers ! Needless to say you have probably made the same mistake before.
I solved this problem by making a trading diary.
With the trading diary I noted down why I believed the trades wouldn’t be successful, after analyzing a few previous trades I came to the realization that the reasons I thought the trades were not going to work out successfully were completely unfounded ! This epiphany changed my trading completely.
Now, instead of judging or analyzing why a trade should or shouldn’t work out I simply look at my plan, make sure the trade meets all of the criteria, then take the trade without hesitation, I don’t look at trades in terms of “is this one better than the other”? to me all trades have the same probability of working out.
A trading journal can also be very useful for when you’re in trades.
When traders place trades they have a tendency to view the unfolding price action as being good or bad for their trade, if you place a buy trade and the market starts to fall your going to relate that as being bad for your trade. The anxiety this creates can cause traders to make mistakes, the closer the market gets to your stop-loss the more anxious you become to close the trade.
You may start to think that your going to lose on the trade even though the market hasn’t hit your stop yet !
Closing the trade before the market hits your stop means you were scared of losing money, most of the time you’ll find the market actually ends up moving back in the direction you had originally placed the trade in, this error in thinking can lead you to miss out on a significant amount of profits, mistakes like such as this can only be corrected by having a trading journal, had you noted down why you were going to close the trade before the market hit your stop you would have found that really there was no reason to close the trade.
Stick To Your Trading Plan
Another use of a trading diary is it provides a way for you to make sure all the trades your taking are to the rules you’ve laid out in your trading plan.
Following a trading plan can be a difficult process for some traders, usually traders will make a plan but only follow some of the rules, Its one thing making a trading plan, but it’s another actually sticking to that plan when trading.
I’ve lost count of how many trading plans I’ve made over the years, it’s probably in double digits by now.
The one thing I’ve found to work quite well when it comes to following your plan is to actually have it physically written down on a piece of paper.
By having it written down your able to read it to yourself before each trade you place, look at the rules in your plan and tick them off one by one in your head when analyzing if a trading opportunity is present in the market, this way your making sure all the trades you take are consistent with what you have written down in your plan.
Get into the habit of doing this, I remember reading somewhere it takes 30 days for an action to become a habit so try this out for 30 days, make sure you ALWAYS read it before every trade you place. Don’t just have it near you and think “I already know the plan” actually hold it in front of you and read it to yourself in your head, is the market trending the right way ? does this pattern/structure you’re seeing actually constitute to a trade setup ? refer back to it when in the trade as well, if your plan says to not close the trade before the market hits your stop don’t close the trade ! Simple as that.