Forex presents traders of all experience levels with a vast range of opportunities and risks in equal measure. It’s for this reason that keeping a trading journal can pay dividends when it
comes to self-analysis and protecting your profit margins.
There’s no doubt that forex trading is a highly lucrative activity. Recent data suggests that the
forex market size stands at $753.2 billion, and is expected to grow at a CAGR of 7% between 2023 and 2028.
Furthermore, some
$7.5 trillion changes hands throughout global forex markets daily. With such mind-boggling figures, it’s clear to see why both retail and professional traders are eager to build their presence in the industry.
However, for even the most accomplished traders, building a profitable portfolio can be difficult to achieve. Data available from the world’s top 10 online brokerages suggest that
between 72% and 85.12% of retail forex traders lose money on their accounts, and in such a competitive ecosystem, it can be difficult to demonstrate the agility needed to capitalize on an opportunity before it’s seized by another trader.
It’s for this reason that traders must take advantage of any practices or good habits that can help them gain an edge over their competitors. One such strategy that’s easy to implement is to keep a trading journal. But what does a trading journal actually
do? And how can traders set one up? Let’s explore why keeping journals can be the key to generating positive trading momentum:
What are Trading Journals?
Utilizing a trading journal is an easy way to monitor your performance by recording the trades you conduct to review and analyze when you have time to look for ways to improve your strategy. This approach can help to optimize your trading activity because
you can actively learn from both your winning and losing market decisions.
By tracking your progress, it’s possible to get to grips with any mistakes that you’re making when
either opening or closing an FX position. You can also use journals to help you stick closer to your trading plan and make more focused decisions for your future trades.
With this in mind, your trading journal can do much more than just record the trades that you’ve executed. You can add your thoughts on each trade, expectations, and the emotions that you’ve felt while making key decisions. This can help you to better understand
the human side of your trading and to look for signs that may cloud your judgment.
The Importance of Using a Trading Journal
The thought of keeping a trading journal may seem like a time-consuming activity that isn’t worth the hassle, but it can bring tangible benefits to your forex trading strategy.
There are many ways in which keeping a journal can improve your performance when it comes to navigating FX markets, and these include:
Refining Your Trading Strategies
Firstly and perhaps most importantly, keeping a trading journal means you can monitor and refine your trading strategy based on the insights you collect.
Having the ability to look at your trades in an orderly manner, and to see exactly where your strategy is succeeding and failing, means that you have the ability to make adjustments on the fly to improve your approach throughout the market.
This means that you can gain unprecedented access to a trial-and-error approach that continues to offer new insights into how you can optimize your strategy on an ongoing basis.
You may even find that your journal exposes a fundamental issue in your strategy that requires a complete rethink. It’s these insights that can help you to discover a plan that suits your goals and expectations.
Enhance Your Ability
While a trading journal has the potential to boost your strategy, it can also help you to become a better trader overall.
This is because a journal can help you to track your progress and
better understand your performance. If you’re on a streak, it can remind you that you’re at risk of developing a hot hand fallacy, or keep you grounded in the event of letting your emotions get the better of you.
Having your successes and shortcomings laid bare in a journal means that you can clearly see the decisions you got wrong, which helps to develop your growth as a trader and learn from your mistakes.
Building a Trading Journal
Creating your trading journal is made simple with the right approach and information sources. Let’s take a step-by-step look at the processes involved:
Step 1: Decide on Your Journal Format
Should you use a book or a spreadsheet? This option comes down to personal preference, although choosing a spreadsheet can be easier on the whole due to the built-in analytical functions that the likes of Microsoft Excel and Google Sheets possess. These
can help for when it comes to reflecting on the performance of your trades.
Step 2: Consider the Information to Record
Your journal should consider factors like your currency pair, size, long/short position, date of trade, chosen strategy, and the overall
success of the trade.
While it can be time-consuming to record as much data as possible, this can make a significant impact when it comes to analyzing your performance.
There are plenty of reporting tools available to help record essential information, but MetaQuotes has recently carried out a significant update to its MetaTrader 5 platform that’s leveraged a series of reporting tools.
These reporting tools have been developed to help traders of all levels boost their efficiency, and the feature helps traders access actionable insights without having to resort to third-party tools to get the results they’re looking for.
As the image above shows, insights are color-coordinated to provide rich swathes of account data, overall profit and loss, deposits and withdrawal information, balance data, growth and dividends graphs, and plenty more.
Furthermore, MetaTrader 5’s reporting tools also feature rich levels of historical data so that you can backdate your journal accordingly for even better past performance comparisons.
It’s also worth adding
more contextual insights to your journal, such as a short explanation of the reasons for your trade decision, your level of conviction when executing a trade, and other relevant information about your general feelings about a trade. Later down the line,
these contextual insights will help you to better understand what you were thinking and why it was either a success or failure.
Step 3: Update Your Journal as Soon as You Make a Trade
For the best results, it’s worth remembering to record the details of a trade shortly after it’s taken place. This way you won’t have to remember your reasoning behind each decision many hours later.
Additionally, you should make these journal entries only after placing your stop-loss or take-profit.
Step 4: Analyze Your Journal Data
After you’ve built up your journal entries, be sure to review your progress from the data you’ve compiled.
One of the best ways to analyze your overall performance is to measure your level of conviction for a trade alongside its historical performance.
MT5’s insights can be a great way of sourcing this data over time, and the addition of your own personal conviction as and when a trade takes place can help you understand whether you’re underperforming or overperforming your expectations. If either is the
case, it’s worth reassessing your overall approach.
By comparing and contrasting your performance against your feelings towards each trade you carry out, it’s easy to understand whether you need to change your approach or alter the volume of trades you carry out based on your confidence levels.
Building a Sustainable Trading Plan
After a few months of
trading and comparing your performance notes in your journal, you’ll be able to set yourself a benchmark to align your strategy and confidence levels.
With your confidence playing a fundamental role in your ability to identify and capitalize on trading opportunities, a journal can be an excellent way of keeping your emotions in check and understanding if your skills are well honed.
Though creating a trading journal may seem like a waste of time to some traders, it remains one of the most effective ways of gaining a holistic understanding of your trading based on a wide range of different contexts. With this in mind, it can form the
basis for a well-optimized trading strategy in the future.
