Trade Journals

Details Matter

Studio shot of spiral notebook and ballpoint pen
Kristin Lee/Creative RF/Getty Images

A journal is a time-intensive process, equivalent to an athlete’s practice: it’s not unusual to spend more time training for an event than actually participating in it. If the journal  is written hastily, with a short entry each day, it will lack the detail that highlight areas in which improvement is needed.

Trading is a business, and the journal is the business plan. The right plan, executed faithfully, can make the difference between success and failure, in any business, not only trading/investing.

The following ideas are primarily those of  Dr. Brent Steenbarger.

Traders make errors when writing their trading journals, primarily because they do not recognize the important role these records play.  

1. The journal includes observations about your trading, but also about the markets themselves.  Most journal entries are skewed toward self-analysis and tend to ignore market observations. Traders who rely on technical analysis (i.e., chart reading) must discover the specific patterns that they want to use. This requires copious note taking and patient culling. As time passes, the skilled technician learns to recognize developing patterns that emerge in real time. A trade journal is a learning tool that trains your eye to notice trade setups.

2. Include observations about your best trades. The idea is to discover how you operate when at your best. Sure, use the journal as a means of self-criticism, but you want to isolate what you are doing when making money.

That allows you to create a model of the success elements, and then rehearse them so that they become habits. In this respect, the journal becomes a tool for discovery, finding what you do well.

3. Use the journal to prepare for the trading day. Journals often report trade results, but do not include concrete plans for the next day’s trade.

For example, if you plan to trade iron condors or write covered calls, include a discussion on current market conditions and their suitability for that strategy. If you run statistical analyses, to find an edge for the next day, list the results in the journal. If there are setups that have been working recently, these go in the journal as well. The idea is to make your journal a true one-day business plan.

4. Outlines the specific steps for improvement, not vague generalities. “I need to hold my winner's longer” or “I need to stick with my discipline” are not sufficient. Identify the specific steps you will take to hold winners (proper profit targets, self-control strategies, etc.) or maintain discipline (risk management, taking breaks, etc.) makes the journal a game plan. Outlining how you plan to approach the market -- and how you’ll approach yourself -- each trading session allows you to review each day and see if you met your goals. These reviews are an essential step in continuous improvement on the path to becoming a successful trader.

5.Journals include performance metrics.  Some of the ones I prefer are:

  1. The number of long and short trades -- I correlate this to the trend condition of the market to see if I’m trading with the current trend, or against it. If I make too many bullish or bearish trades in a range-bound market, it is likely that I am over-trading. 
  1. Number of winning and losing trades -- When I’m trading well, I have more winning trades than losers by a healthy margin. When the ratio dips for more than a short time period, I re-evaluate my trading and trading strategies.
  2. Time holding trades -- I’m a short-term trader, and I tend to have a relatively narrow time band in which I hold trades. Moving beyond that band tells me I’m either cutting trades short or going for home runs -- and neither of those have worked for me in the past.
  3. Time holding losing trades versus winners -- It is very hard to make money by holding losers. Eventually, the size of the losers becomes greater than the winners so that even winning a majority of the trades leaves a trader in the red.
  4. Profit/Loss, broken down by long and short trades and market conditions. This tells me if I’m trading ranges better than breakout movements; whether I’m doing better on the long side or the short side. If my performance is significantly worse in one mode than another, I start to examine my trading for needed improvements.

    Dr Brett's ideas are (obviously) for short-term traders, but the overall discussion on how to use journals is appropriate for all traders/investors.