Last Updated on 15 January, 2025 by Trading System
A Trading journal is a tool that you can use to keep track of all of the trades that you have made. It can be as detailed as you want and can be kept both digitally or on an actual journal. The surprising thing is that many people perceive trading journals to be a gimmick and thus forgo the benefits that they could attain if they kept these journals.
Trading journals have a lot of benefits such as giving you the ability to keep track of and monitor your progress, see which of your strategies and systems have the most amount of success, and help you determine areas which require improvement. Trading Journals can even be used to test the waters before you dive into an unfamiliar market!
Before we take a look at 10 benefits of using a trading journal, let’s take a look at how to keep a proper trading journal which can be useful to you in the long term.
How to Keep a Trading Journal
A good Trading Journal is one that has information about each and every single one of your trades. You must not omit a trade because of any reason since the trading journal is not something that you keep as a source of pride or proof of your successes. The purpose of the trading journal is to help you review weaknesses in your trading methodology and help you bridge those weaknesses.
While writing your trading journal, remember to include as much relevant information about every trade as possible. Not only should you mention the profit/loss, but you should also include why you went long/short and what were the reasons for you being right or wrong. This way, you will have a lot of information once you sit down to review your trading journal.
Still, it is important to not be too detailed, since it might make it harder to stick to in the long run.
Here is some information about every trade that you could include in your trading journal:
- Date
- Name of security
- Number of shares/Total investment
- Description of trading signals
- Description of the entry and exit signals
- Stops used and reasoning behind them
- Total gain/loss from the trade
One last thing that you should try to do while keeping a trading journal is to write down your emotions. It is best to keep track of how you felt both in general and specifically about the trade before, during, and after you placed it.
Keeping track of your emotions will be of immense help during the review phase as once you become aware of them, you will learn to control them. Once you have contained your emotions, you will be less likely to make rash decisions which can only impact your trades in a negative manner.
How Can You Benefit From Trading Journals?
Remember that in order to avail of the full benefits of a trading journal; you must be consistent.
Unless you keep a completely unbiased and comprehensive journal, you will not be able to utilize it properly during the review phase!
Here are some of the top benefits of a trading journal:
1. A Trading Journal Helps You Ascertain Each Setup’s Viability
Every trader has multiple different setups that they utilize depending on the situation. However, what many traders fail to realize is that they might better at using certain setups than others.
For example, some traders are bound to do better in trending markets than in mean reverting markets, while others might have skills more suitable for markets that are range-bound.
Once you have a few months of data (ideally at least 3 months) in your trading journal, you can open it up and take a look at each individual system to see how successful or unsuccessful it has been for you. 3 months is a fairly long time to determine the viability of a particular system, especially if you are someone who trades on a daily basis.
When you see that certain systems are more profitable for you, it is best to employ those systems at a higher frequency so as to turn a bigger profit.
2. A Trading Journal Can Help You Work on Your Weaknesses
Just because certain systems work for you, that does not mean you should only use those systems and forget about anything else. The fact is that trading systems take a long time to develop and have some sort of utility. All trading strategies fail eventually and need to be replaced. Keeping this in mind, it is important that you always strive to find new ones to replace the failing strategies.
When looking for new strategies you will find that trading systems can sometimes be quite tricky, even when it comes to easy strategies. As such, there is a possibility that you did not understand the system properly or you are not implementing it correctly.
Luckily, you have the trading journal at your behest. Thoroughly review all of your trades to see where you went wrong and try to account for your mistakes from here onward.
When it is time to review your trading journal once again, you can compare the performance of the two periods to see if you experienced any improvement.
3. You Gather Industry-Specific Data
It might turn out that you have a natural aptitude for oil prices. It could also be that your experience in the aviation industry makes you far better at trading airline stocks than tech stocks.
Although many traders are able to identify markets in which they have an inherent advantage, a trading journal can make sure that you are aware of where your strengths lie.
When you get to the review stage of your trading journal, you can take a look at the trades that you made in each specific industry or security type. This way, you will be able to ascertain which area you can be the most profitable in.
Remember that you can further break down the area in which you trade securities. For example, you might be extremely knowledgeable when it comes to computers and thus are able to trade stocks of computer manufacturers with ease, but fall short when it comes to cloud-based companies. While both computer manufacturing companies (e.g. Dell) and cloud computing companies (e.g. Dropbox) are tech stocks, they are very different from one another.
4. A Trading Journal Helps You Set up Incremental Goals
You can set up goals which are marginally better than your previous ones so as to not put unnecessary pressure on yourself while you are still in the learning process.
A journal is a great way for you to decide what goals you are going to pursue, how you will measure your progress (e.g. the timeframe), and what you are going to do in order to achieve your goals.
A trading journal can help you in this regard as it can tell you what you need to work on if you want to hit your next goal. For example, it may turn out that you are not doing well in the stock market due to external factors, so it might be time for you to give stocks a break and shift your focus to other investments for a while.
5. A Trading Journal Can be Used to Keep a Virtual Portfolio
Although there are numerous programs available on the web which can help you set up a virtual portfolio, a trading journal can also be incredibly useful in this regard. Beginner traders can set up a trading journal with a hypothetical amount of cash ($100,000 is a great starting number) to see if they are able to outperform the market or not. If you are able to do well in the market, then it might be the correct time to start using real money. Just be aware that the psychological pressure that you experience in live trading is absent when trading a virtual portfolio.
Even experienced traders can utilize the virtual trading journal to their advantage. For example, if you are someone who is experienced in the stock market but want to expand into the futures market, then a trading journal can be a great practice tool while you learn the ins and outs of the futures market. Eventually, once you are consistently able to generate a profit in your trading journal, you can begin using real money.
Do remember that if you are running a virtual portfolio in your trading journal, you must also factor in brokerage fees so as to have accurate returns.
6. A Trading Journal is Great For Monitoring Potential Growth Stocks
If you are someone who is looking to invest in growth stocks for the long-term, then a trading journal might come in handy. Instead of purchasing the stock, you can start documenting all the information about the stock that you can find, including the trends as well as the risks associated with purchasing the aforementioned stock in your trading journal.
Over the course of a few weeks or months, you should have enough data on your hands to attempt to determine the future price of the stock to a reasonable degree. Based on this information, you can make an investment. However, do remember that investing in growth stocks generally requires more of a fundamental approach to the stock market as opposed to a technical one.
7. A Trading Journal Holds You Accountable
Having a trading journal means that you are less likely to make trades that are not a part of your trading plan. For most traders, it is the impulsive trade that causes them to take a loss.
As such, being able to look back at points in time when you did not stay true to your trading plan and ended up taking a loss, will help you the next time you are ready to do the same.
8. A Trading Journal Helps You Manage Risk More Efficiently
Many people do not realize that their risk management technique is costing them a lot of money. For example, it is possible that you might have the same risk management strategy for both small and large trades. This could be a terrible idea since you need to be more prudent during larger trades as they could end up costing you a lot more money.
A trading journal helps you see where you might be making mistakes with the handling of risk. It could be that you are not taking a big enough risk to generate a substantial reward by setting the stop loss way too close to the current price, or you could have a position that is simply too small to result in any kind of meaningful gain.
The opposite may also be true, and after some time of journaling, you might decide to shrink your position size since you find that you cannot cope with the wild swings!
9. A Trading Journal Helps With The Psychology of Trading
Many people have mental blocks which do not allow them to take risks. Remember that in order to make meaningful returns, you need to take a sufficient amount of risk.
Emotions in general play a massive part in your trading (especially if you are a day trader). A trading journal can be a great way to see if you are letting your emotions get the better of you.
For example, a trading journal can help you see if you ever get angry after a loss and start making trades which do not make any sense so as to recoup your losses. A trading journal could also help you see if you end up making rash decisions after you have had a run of successful trades (and vice versa).
10. A Trading Journal Brings Consistency
Eventually, as you continue to use your trading journal, your bad habits will start to diminish and you will stop losing money foolishly as often. This is because you will be able to see the mistakes that you are making, and will make sure to try to avoid making them in future trading sessions.
Certain mistakes are only obvious after you have been using a trading journal for quite some time. As such, it is important that you keep an accurate trading journal in which all of your trades are accounted for so as to avail the full benefits of it.
Bottom Line
It is quite clear that keeping a trading journal has numerous different benefits. Keeping a trading journal is recommended not only for beginner traders but also for the advanced ones. The beautiful thing about trading is that no matter how good you are, you can never be perfect. Thus, there is always something that you can improve on.
Although it might be difficult at first to keep track of every single trade you make (especially if you are a day trader), remember that keeping a trading journal requires a fair amount of discipline, and discipline can only help you be a better trader in the long term.
FAQ
How should I keep a proper trading journal?
A good trading journal should include details about each trade, such as date, security name, number of shares/investment, trading signals, entry/exit signals, stops used, and reasoning behind them. It’s essential to record emotions before, during, and after each trade to enhance self-awareness and control.
How can a trading journal help determine the viability of different trading setups?
A trading journal, with at least three months of data, allows traders to assess the success of individual trading setups. By analyzing performance, traders can identify setups that are more profitable for them and adjust their strategies accordingly.
How does a trading journal help in gathering industry-specific data?
A trading journal aids in identifying areas where traders have a natural advantage. By categorizing trades based on industries or security types, traders can determine where they are most profitable, leveraging their expertise for better decision-making.