4 Reasons You Need a Diary for Both Good and Bad Forex Trades
Historical Record
Over a period of time, the journal will provide a historical
perspective. Not only will it summarize all your trades, but it will
provide, at a glance, the state of your trading account.
In other words, it becomes your personal performance database, which
will provide you with the opportunity to go back in time and determine
how often you traded, how successful each trade was, which currency pairs performed better for you, and even what time frames gave up the best profit percentages.
Planning Tool
Not only should a good trade journal record your actual trade data, but
it should also provide information on what your plans are for each
trade. This feature allows you to consider each trade before you take it
by setting parameters for where you want to enter, how much risk you
can accept on the trade, where your profit targetwill
be set, and how you will manage the trade as it proceeds. In other
words, the journal becomes a way for you to record your thoughts in
actual numbers and makes it possible to convert wishful thinking into
practical reality. It forms the basis of a method for planning your
trade and then trading your plan.
Methodology Verification
Another very important
by-product of a trading journal is the fact that, over time, it will
verify your methodology. You will be able to see just how well your
system performs in changing market conditions. It will answer questions
like: How did my system perform in a trending market, a range bound market, different time frames, and the impact of your trading decisions such as placing stop-loss orders,
too tight or too loose? In order to retain the full details for the
logic behind a particular methodology, the trading journal must be fully
comprehensive.
Mind Pattern Modification
One of the most useful features of your journal will be the concrete
help it provides in forcing you to change your habits from destructive
to constructive. As you learn how to trade your plan, you will develop a
greater level of confidence. Your profitable trades won't feel so
random, and your losses will be "planned for," and therefore won't ding
your psyche in a way that will make you feel that a loss means you are a
loser. A very important mental and emotional factor in trading is your
level of confidence. Confidence is the antidote for the fear and greed
cycle in which many traders will
get caught. Fear and greed is a natural, hardwired response in most
humans. If you are winning, you want to win more; if you are losing, you
feel fear and even panic as your account dwindles toward zero.
Having a journal that gathers your statistics sets up a trading plan by
defining parameters of action needed, provides a rear view mirror so
that you can measure how well you executed each trade, and most
importantly, provides you with the feedback to develop and evolve your
trading skills. You will find a good trading journal to be a best friend
and mentor as you make progress. (Market hours for Tokyo, London, and
New York determine volatility peaks. Find out how in The Forex Three-Session System.)
The Two-Part Journal
It is recommended to set up a trade journal that accomplishes two main concepts:
- A chronological columnar list of trades you can total and aggregate so you can have a record of all your efforts. This is best accomplished by handwriting in the columns all the pertinent data. Of course, you can keep records using an Excel spreadsheet that can automatically do the math for you, and which will remove simple calculation errors. This depends on your own abilities in spreadsheet modeling.
- A printout of the actual chart you used to determine the trade, indicating your entry level, your stop-loss level, and your potential profit level should be clearly marked up on the chart. Mark the reasons you made the trade on the bottom.
Finally, you should set up a journal for each type of trading
methodology or system you employ. Do not mix systems, as the results of
your trades will derive from too many variables and will then be
inconclusive. Therefore, if you have more than one trading system or
methodology, you should keep a journal for each one.
Every trade you record should be based on only one particular system,
which will then give you the ability after 20 trades or so to calculate
the expectancy or reliability of your system.
Here is the expectancy formula:
Example: If you made 10 trades,
and six of them were winning trades, four losing, your percentage win
ratio would be 6/10, or 60%. If your six trades made $2,400, then your
average win would be $2,400/6 = $400. If your losses were $1,200, then
your average loss would be $1,200/4 = $300. Apply these results to the
formula and you get:
or 40%. A positive 40% expectancy means that your system will return you
an additional 40 cents over every dollar in the long term.
The Bottom Line
Once you know your system's expectancy, you can act with confidence.
Confidence is the key to execution. If you lack confidence you will not
be able to execute your trades according to your plans and you will
either second-guess yourself or become paralyzed from too much analysis
of data coming in from the market. Make a trading journal your first
trading habit. It will become the key to all your good trades in the
future.
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