Those who view their trading activities as a business most likely keep a trading journal. This is no different than any other business that uses reports and historical data to measure the firm's performance. A trading journal will allow you to assess the overall performance of your trading activities in an organized fashion.
A trading journal can be as simple, or as complex, as one chooses. Some traders use a spreadsheet to record appropriate details of each position, including but not limited to:
- Entry date
- Price of underlying
- Position size
- Exit date
The spreadsheet may also include other pertinent facts about each trade including position greeks, individual option prices, etc. This depends, of course, on the type of strategies traded and how complex the trader chooses to make the spreadsheet.
An alternate consideration for a trading journal other than a spreadsheet is using a conventional lined notebook with hand-written entries. With all of the software and spreadsheet tools available today, this may seem like a backward approach to many of you. However, I have found that writing down all the specifics as mentioned above, along with personal observations analyzing every trade after it is closed, is very helpful in managing my trading business.
What would a trading journal such as the one described look like?
Start by dividing the trading journal page in three columns:
- The first column would describe the trade itself… position, size, date of entry, margin, etc. , much like what would be included in a spreadsheet, only in a conventional journal format. I like to include pertinent information on the market in general… if an entry was timed around any particular economic news event, or on earnings for a certain underlying.
- The second column of the journal would summarize the outcome of each trade, including the dates exited, profit/loss, etc. It would be helpful for future reference to also include notes on how the position was closed, i.e. scaling out, all at once, etc. If you consistently trade one or two stocks or indices, it is also beneficial to include how easy, or how difficult the exit was, and if fills were close to mid, etc.
- The third column of your journal would include all of your psychological observations for that particular trade…your general confidence in the trade, how you were feeling as you prepared to enter and exit the position. This third column could also include your feelings about how well you felt you managed the trade upon entry, adjustments, and exit. This third column is really open-ended, it can be considered a record of your emotional temperature during the cycle of each of your trades.
Whichever format you decide to use for a trade journal, keeping it manageable is important. You do not want it to be so complex and time-consuming that you avoid keeping it up to date. The whole purpose of a trade journal is an accurate, consistent record of each and every trade, whether they be day trades, weekly trades, or longer term monthly trades.There is no perfect journal format that will suit every trader's needs and trading style; it's important to adapt your journal to a style that fits your own trading style.
Now that you're keeping a journal, what should you look for as you review the entries?
As you review your trading journal, you will want to look for any patterns in your trading. For example, you may believe that you have been adhering to your trade plan with regards to entry date, but in reality, after reviewing your journal, you find out that you have drifted away from your plan without even being aware that this was happening. Many times we get so immersed in our day to day trading activities, that we are not aware of any particular patterns developing that may affect the longer-term profitability of our trading business. That is the main function of a trade journal; it enables you to monitor your own activities and take appropriate action to get back on the path set forth by your trade plan.
If the spreadsheet format works for you to help analyze the performance of your trading business, you may not want to change anything. But, if you do not yet maintain a trading journal, or are looking for an alternate way to monitor your trading performance, consider the simple journal format I've described above.
If you would like to share the type of record-keeping you find most useful in your trading business, feel free to comment below.