Warren Buffet is one of the most successful investors of our time. For more than 60 years, he has accumulated billions of dollars in wealth by following a simple investing strategy. Every year at the Berkshire Hathaway annual general meeting, he talks about his investments and the thinking behind most of them. As one of his biggest fans, I always read the letters that he puts forward during the meeting.
One of the things that Warren tells investors is on the need to write the reasons for all their investments. This is a practice he has followed for more than six decades.
As a trader, a trading journal will always play an important role in guaranteeing your success. A journal is simply a document where you write the thinking behind your trades. Any time you open and close a trade, you must always have reasons for doing it. This is the information you need to put down. In the immediate period, this might not seem useful but if you develop the culture of doing this, you will start seeing the benefits.
A trading journal can either be written in a piece of paper. Alternatively, you can create a spreadsheet template that you will be using any time you open, modify, or close a trade.
There is no recommended format for a trading journal. You are free to tweak your journal as you feel like. However, I believe that a good journal should have three columns. In the first column, you should have the assets that you want to trade in. Remember, as a trader, you don’t need to be an expert in all assets. You can even be a trading expert by specializing in one asset like crude oil.
So, in the first column, you should list the assets. In the second column, you should write the action. The action can either be Buy or Sell. The next column should have the price when you have initiated the trade. The next column should be the areas where you have placed the take profit and the stop loss.
Next, you should write down the reasons for opening the trade. Was it because a certain combination of technical indicators was reached? Was it because of a major breaking headline? Was it because of a false breakout? In this column, you should put down the justification of the trade and the decision that you make.
Next, you should put down the price at which you end a trade and the reasons for that. Was it because a stop loss or take profit was triggered? Was it because the trade reached the target or was it because the thesis didn’t work out. Finally, you should write down the profit or loss for the trade.
Having a journal will play an important role in guiding you become a better trader. It will also help you avoid repeating the same mistakes. If you are thinking of a career at an investment bank or hedge fund, the journal can help you land a job.