Account statements will tell you what you bought, sold, when, and for how much. A trade journal helps document how and why you made the trades that you did; the subjective thoughts, feelings, and assumptions that went into making those decisions.
Athletic coaches at every level analyze video to pinpoint what's working and, more importantly, what's not working. This way the coach and the athlete know exactly what needs to be done to improve performance. Traders can spot patterns and benefit in the same way with a trade journal. It's an important tool to help support your trading discipline, potentially improve your performance, and enhance your experience.
What should be in a trade journal?
Your trading account provides one level of accountability. Your trade journal offers a different kind of accountability by forcing you to write down why you made the decisions that you did. Like keeping track of what you eat, if you don't want to record a particular behavior it is likely that it is a departure from your plan.
Some general guidelines for what to include in a trade journal are captured below.
- What you did
- Why you did it
- How you felt
- How did it work/not work
- What you learned
- Adjustments for future trades
- Expectations for the trade (price targets, exit targets)
Write it down. No, seriously, write it down.
When evaluating their trades, some traders rely on memory. Three months after a trade, it is hard to remember everything that went into it. A good trade journal captures your thinking when you placed the trade. Pay particular attention to those things that you would rather not write down. They may reflect behaviors that negatively impact your trading.
We can't overemphasize the importance of maintaining a physical journal. It doesn't matter if your journal is hand written in a spiral notebook, an online worksheet, or a series of screenshots with notes; having them in your head isn't good enough.
Many traders have "selective" memories. They remember the trades that look good and have a way of photo-shopping the uglier ones away. This distortion in recall will make it harder to make necessary adjustments in the future. This fuzziness may increase the chances of repeating a mistake. The key to a good trade journal is to put it in writing and be specific.
What a trade journal can uncover
- Your trading patterns and tendencies—A good trade journal will raise visibility to good and bad habits. You can "see" if you have a tendency to get in too early or too late. You may find that you stay in trades too long. Finding your particular trading tendencies is part of improving your performance and reaching your goals.
- Trading behaviors you're trying to avoid—All traders have trades that didn't work out. We have all strayed from our plan. And, no one has cornered the market on "stupid mistakes". Write these down in your journal! These notes may provide you with the most useful information by highlighting your potential blind spots and bad habits.
- Emotional responses to trading—A trade journal can also moderate the tendency to overcorrect. After a tough stretch it is easy to begin questioning everything you do. It may make more sense to make smaller adjustments than doing a complete overhaul. A trade journal can help temper your reactivity. It can also help you resist the temptation to fall into 'revenge trading' where you want to settle a score with the stock tied to a losing trade. Maintaining perspective on your trading is critical to survival and progress.