Trading journals are complete records of all your trading
activity over time. You write down the results of all your trades to review
your overall performance.
The following explains some of the biggest reasons why
trading journals are important.
Trading Journals Help Shed some Light
Trading journals come in handy when you have started
experiencing negative results. As we all know, a losing streak can lead to damaged
morale for the trader. There are times when this makes it difficult to point a
finger on the real reason why you’re losing.
Read further: Breaking Down Risk Management
It would be easier to know if your trading strategy is still
or if it’s time to change it if you are able to take a quick look at your
previous trading sessions. Perhaps you have diverged from your original trading strategy and you just didn’t notice.
When you have a comprehensive record of your trades, you
will be able to spot certain time intervals, during which your average profits
are off by a certain amount. This could be brought about by regular release of economic
indicators, certain events, or others.
Your main goal is to prevent knee-jerk reactions. When you
stop these impulsive actions, you’ll be saving money.
Steps in Keeping a Trading Journal
There are several steps that you have to follow.
First, write down
why you are entering the position. This will give you time to review the position
in an objective, unbiased way. You can organize the logs in a spreadsheet that
would show you the overall profit of single trades or a string of trades and
produce an equity chart. Writing down your reasons when entering a position
will also make you consider your position better.
When you keep a trading journal, you also prevent yourself
from committing what it called “revenge trading,” which typically happens when
a newbie trader has a losing streak or an unexpected huge loss. This forces the
trader to enter a transaction right away in an attempt to offset his losses.
Think about Exit Strategies
You should also think about your exit strategy even before
you enter a position and commit. Basically, the whole act of trading should all
be planned for and written down in a trading journal.
Having a pre-planned exit strategy can help you avoid
feeling greedy or doubtful. Humans are prone to pressure and stress when
trading, so it is better to have the exit plan written down before feeling
pressured.
Lastly, you should write down the reason why you closed the
position after you exit the trade. This is
important particularly when you have deviated from your trading plan.
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