Since the advent of online share trading, people have been able to trade more independently. When previously every trade you made would be actioned by a broker, who would then keep records, now traders can buy and sell through online platforms.
And, although some of these platforms may record your trades, your profits and losses and your running total, there are a number of reasons why it is beneficial to maintain a separate trading journal.
1. Historical record
Over time, your journal will offer a historical perspective of both your winning and losing trades, including trading patterns you may not have realised you had, and this can be valuable in preventing future mistakes.
It will also show the profit and loss of your individual trades, and their accumulated effects to date, allowing you to measure your share trading performance.
2. Planning
Along with providing historical information, a good trading journal should also record information on your plans for each trade. This makes it more likely that you will consider each trade before entering it by setting parameters for where you want to enter, your risk-reward ratio, and how you will manage the position while it is open.
From a historical perspective, it will also offer another aspect for evaluating what was successful for you and what wasn’t.
3. Future trading
Being able to evaluate your trading performance in detail can help you develop your trading skills and change your habits, so you make fewer mistakes and more winning trades. This can also make you feel more in control of your trading – your profitable trades will no longer feel random, and you will no longer get so attached to losing trades, which is an important part of trading psychology.
Your share trading journal
A good trading journal should consist of the following:
- A chronological list of trades including dates, times, opening and closing prices, profits and losses, and a running total of your account balance.
- A printout of the charts you used to determine the trades, noting down your entry and exit prices, your stop losses and your profit targets.
- Your reasons for entering the trade including
a. Fundamental – “there is a company announcement coming out today that, based on the company’s balance sheet, I believe will be negative and will result in the share price falling”
b. Technical – “the share price has reached a support or resistance level”
c. Sentimental – “market bullishness has been very high for months and it is no longer supported by fundamentals or technicals, so we may be approaching a reversal”
Also, if you use a variety of trading systems, it is a good idea to keep a journal for each one. Although it might be extra work, combining different trading systems in a single journal will incorporate too many variables for you to accurately measure what works and what doesn’t.
Evaluating your trading system
Once your journal is established, a formula for calculating the expected returns of your trading system is:
Expectancy = [1 + (Average winning trade/average losing trade)] x Percentage of wins – 1
So, after twenty trades, if the value of your average winning trade was $250, your average losing trade was $150 and 60% of your trades were winning trades, your expected returns would be 60% of your initial investments.
Expectancy = [1 + (250/150)] x 0.6 – 1
Expectancy = 2.67 x 0.6 – 1
Expectancy = 0.6 = 60%
So, for every dollar you invest, you could expect to receive an average return of $1.60.
Conclusion
Once you have a system in place, recording your trades in a trading journal will enable you to calculate your expected return over time. If your expected return is positive, you can confidently execute trades according to your system. Keeping a journal will also record whether the expectancy of that system changes over time. If it does, you will be able to determine why more easily, and will be better prepared to take advantage of the additional profits, or mitigate the additional risks.
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