Rochon, Diane, Modern Trader
Trading journals can reveal much more than the number of winning vs. losing trades you have experienced. Analyze your journal and you will find your own distinct trading patterns.
Trading decisions for day-traders often take a split-second. You wouldn't take a trade that didn't warrant action -- or would you? Writing daily in a trading journal can help determine if you are acting on trades that have proven themselves as solid risks. You also may find patterns in your trading that reveal what you are doing right or wrong.
Both day-traders and longer-term players need a proven trading strategy or methodology that includes target levels, solid execution rules and a strong money management plan. But they also need to monitor their trades as well as their actions. While most professional traders either have mentors, trader managers or clients to guide them (or to answer to), individual traders must regulate themselves. A trading journal can put your track record in an objective light, thus allowing a clearer picture of your strengths and weaknesses.
By having an objective viewpoint of your actions, you effectively are getting in touch with yourself. And although many traders don't like to talk about the psychological aspects, if you don't address them, you likely won't be a trader for very long. Successful traders are well aware of their strengths and weaknesses and choose to look inward for solutions -- that is, they don't blame the market, someone else's analysis or a "bad" fill.
Reading between the lines A journal can reveal trading and, yes, even psychological patterns. The point of a trading journal is not to find out why your parents liked your brother better, but rather to help you find both the profitable and unprofitable aspects of your trading. George Kleinman, president of commodity.com and author of Trends in Futures newsletter, notes, "For years I've kept what I call a 'trade plan.' I just write down mistakes and triumphs that I've had in the markets for the purpose of trying to avoid the mistakes in the future and trying to repeat the triumphs."
Several patterns may be discovered when reviewing a trading journal. If trade specifics are recorded, you may find time periods that exhibit an inordinate amount of winning or losing trades. Another type of winning or losing streak that can be revealed is length -- some traders may not be able to keep a winning streak going for more than five days, while others can go on for weeks.
Often, trading managers will review the winning and losing patterns in a trader's track record to determine the trader's "pain threshold." This is a crucial aspect in understanding your trading strengths and weaknesses. If your journal is honest and complete, you should be able to determine how many losing trades in a row it takes before you spiral out of control. For some, it may only be three trades, while others can handle a three-month long losing streak.
Patterns also can be found in the markets you trade. For example, do you have more success trading energy or financial futures? Perhaps you'll find that currencies' unique idiosyncrasies escape you, or grains characteristics are more indigenous to your brain.
Dear diary To get the most out of it, a journal should include trade specifics. This means recording all of your trades and their entries, exits, target levels, risk/reward ratios, specific reasons for taking the trade (technical or fundamental) as well as the results. This is a lot of writing -- particularly if you are day-trading -- but the upside to keeping a daily journal is that its time-consuming factor can minimize the chances of overtrading (yet another pattern that can be discerned from a journal).
You may even want to include a synopsis of any discussions you've had about a trade. This could lead to an important discovery about how you deal with others' comments or advice. Do you back down and exit the trade when someone disagrees with your position? …