Stop Losing, Start Winning! Part 2: Keeping a Trading Journal

If you adhere to this trading process you will be armed with useful information about yourself and whether your trading

You now know how to read the market after getting the right education. You also have a well-written trading plan. There are still a number of components that need to be in place before the trading process can begin. These components make up the framework. Once the framework is in place the trading process can begin.

These are the components that make up the framework:

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  1. Trading Plan
  2. Trading Log
  3. Trading Journal

What I would like to do is to outline the trading process without going into too much detail. I will also highlight the importance of a trading journal.

Following is the daily trading process:

  1. Write an entry in trading journal
  2. Prepare yourself to trade
  3. Analyze the markets you trade with a view to finding trading opportunities
  4. Wait for the market to show you a trading opportunity in your trading plan
  5. Take trade
  6. Take picture of trade entry
  7. Write an entry in trading journal
  8. Manage trade according to trading plan
  9. Take picture after trade is closed out
  10. Take picture of what happened next
  11. Enter trade in trade log
  12. Write an entry in trading journal

If you adhere to this trading process you will be armed with a lot of useful information about yourself as a trader and whether your trading plan is working for you. You also have to learn how to use the data you have collected in the trading process to help you improve as a trader. You need to know how to evaluate your trading results and performance. Once you get this process down, the market will be your biggest teacher. The market will teach you all that you need to know.

Now I will focus on the importance of keeping a trading journal. You could even call your trading journal a psychological log. A trading journal is where you keep track of your thoughts and feelings throughout the trading process. I think it is best to show the power of a trading journal through a number of scenarios where a trading journal can shed light on what is holding you back from becoming a successful trader.

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First Scenario

You take a trade exactly according to your trading plan. You had the patience to wait for the exact conditions to happen as spelled out in your trading plan. The trade immediately goes against you. You close out the trade early. You then watch in astonishment as the market goes on to hit all your original targets without you on board. When you go through the evaluation process you can take a look at your trading journal and see what was going on in your head that caused you to not keep to your trading plan. You see written in your trading journal that you were afraid that the trade was not going to work, so why lose a full $500 when you could just lose $300, so you closed out the trade.

If you had just evaluated your trades without the trading journal you would have seen that you had a lapse in discipline which caused you to deviate from your plan and close the trade early. The problem is you do not know what caused the lapse in discipline. Armed with your trading journal you now know why. You know that the fear of losing money caused you to break your rules and close the trade early. You now know that you have to work on this fear in order to succeed as a trader. Just being vague and saying that it was a lack of discipline is not good enough. You want to get to the root of the problem and fix it.

This is the work of an aspiring trader. I tell all my clients before I begin to train them that they are going to learn a lot about themselves. They are going to uncover their strengths and weaknesses and learn things about themselves that they did not know beforehand. An interesting side product of becoming a successful trader is also becoming a better person. Trading is like a mirror that reflects you back to yourself. This is the power of a trading journal.

Second Scenario

You have been sitting at your trading station for 4 hours and have yet to take a trade. You think to yourself that you are the master of discipline and even write that down in your trading journal. Suddenly the market explodes and you jump into a trade on the buy side. The market immediately turns on you and you are now down $500 which is your risk per trade. You stare at the screen in disbelief and watch the market move more against you. You are now down $1,000 and quickly close the trade. The market immediately reverses. It goes past your entry price and continues to rise until you would have been up over $2,000. You feel angry and frustrated. When you come to evaluate this trade you see that it did not meet the entry requirements.

It was not even in your plan. You have a discipline problem, but what is causing it? You take a look in your trading journal and see that at the beginning of the trading day you were doing great with the discipline. You just sat for 4 hours sitting on your hands as there was nothing to do. You did a good job, so what happened? You saw the market suddenly take off and thought you were going to miss out on a huge move so you just entered the market without a stop or target or any planning at all. On further evaluation of the trade you see that the exact place where you finally pulled the plug on the trade was exactly where you should have entered the market according to your plan.

You did not even see that entry as you were blinded with fear of losing more than you should on the trade. You now know why you broke discipline and took a trade not in your plan. You were afraid of missing out on a huge move. This is what caused you to just jump into a trade. You have also learned the consequences of taking such action. A little more patience to wait for the correct moment would have produced a big winning trade.

The main point is that we may know what problems need to be addressed in order for us to become successful traders, but that is just the “what”. To fix the problems at the root require us to ask “why”. We want to know why we are doing certain actions in the market that are harming us. A trading journal helps us to hone in on the “why” of our actions. Once we are armed with this information we can now work on what needs to be worked on and continue on our path to become a consistently profitable trader.

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