Ever feel like you’re not improving as a trader? Perhaps you need to take a step back and take a critical look at your trade process. Whether you’re a systematic or discretionary forex trader, the importance of maintaining a thorough Forex trading journal cannot be overstated. In this article we will take a look at what goes into a trading journal and why maintaining one is so important.
Why Are You Entering a Trade?
If you are a discretionary trader, this aspect of your Forex trading journal is incredibly important. Even as a systematic trader, recording each and every entry will allow you to gauge how strictly you are adhering to your system. For each and every trade you should record whether you took the trade based on fundamentals, technicals or a combination of the two and detail the exact circumstances that led you to take the trade. You should also include where you have placed your stop and take profit levels at this stage, your reason for doing so and how much you are risking on the trade.
Entry – Fundamental / Technical: Looking to buy USDCAD due to FED / BOC rate path divergence. Bought USDCAD. Went long when 20SMA crossed above 100SMA.
40 pip stop loss below the recent swing low, 2R target below last week’s high. Risk = 5%.
Recording the reasoning behind trade entries in this manner will allow you to look back over your trades and analyze which entry methodologies are working for you and which aren’t. Recording your stop loss and take profit decisions will grant you invaluable insight into effective stop and take profit placement.
In Trade Notes
Once you have taken a trade and detailed your reason for entry and SL / TP placement, you should then leave observatory notes as to what happens during the trade. Does the market move immediately in your favor? Or does the market move against you first? Perhaps your trade never enters profit, and you are almost instantaneously stopped out. How do you feel about the trade? Are you confident or anxious? Are you going to trail your stop loss?
In trade: Pair pulled back 10 pips following entry. A little anxious.
The pair continues to pull back and is starting to look bearish. Stop loss likely to be triggered. Quite anxious, considering cutting Forex loss.
Pair surged higher on US durable goods data, within striking distance of take profit level.
Trailing stop to breakeven.
Recording market behavior following your entry will allow you to fine tune your entry, stop loss and take profit levels. Recording how you feel will teach you to either ignore or listen to your gut (this will vary from trader to trader). If you are always feeling anxious during a trade, chances are you are risking too much.
Result & 20/20 Hindsight
Finally, you will record the result of your trade and with the benefit of 20/20 hindsight, record what you did well and where you could have improved. This is extremely important – especially with a profitable trade! Though you will fill the 20/20 section out once your trade is complete, you may want to come back later and add more incertain situations.
20/20: Take profit hit +10%.
Entry could have been a lot better – if waited for pull back following MA signal, could have bought 30 pips lower with tighter stop, same target.
Ignoring anxiety paid off – acting on would have led to a loss. Perhaps I’m risking too much per trade?
Locking in breakeven was a good idea – allowed me to relax and let trade play out.
All in all, a good trade, though room for improvement.
Market has since continued to rally – could have taken an extra 80 pips / 2R
This section is truly invaluable. Critiquing your trades in this manner will provide you with priceless insights regarding your trade process and psychology.
Rinse, Repeat and Analyse
On to the next trade. It is impossible to draw reliable conclusions from a single trade. Repeat the above process for your next 20 trades and then analyze your results. Once you have done this, you can start to draw reliable conclusions and begin to adapt your trade process appropriately. Do you need to work on your entries? Should you ignore your gut or listen to it? Are you risking too much? Are break even stops paying off, or are you getting needlessly stopped out of winning trades? Are you taking profits too early and strangling your performance? You may find you are constantly getting stopped out by fractions of a pip and need to move to a low spread account.
Once you have a solid sample base of 100 trades or so, you can start categorizing your trades and see what works and what doesn’t. For example, you can look at all your fundamental or technical trades in isolation, or delve deeper and break them down into news trades or trades based on one particular signal or another. You could even look at stop loss distances: perhaps you have a 75% win rate on trades with stops greater than 30 pips, but only 40% when trading with tighter stops. The possibilities on this front are literally endless, as are the opportunities for improvement.
When we talk to clients, there is a common theme: the vast majority of profitable traders maintain Forex trading journals and critically analyze their performance. Conversely, the vast majority of unprofitable traders don’t bother and end up giving up. It’s up to you: which sort of trader do you want to be? Maintaining a Forex journal and critically analyzing your performance is incredibly simple and leads to some, quite frankly, outstanding results.
Article provided by Vantage FX, Australian Forex Broker.