By James Trescothick, Chief Global Strategist, easyMarkets
Dear Diary, the importance of a traders dairy
Memory is a funny thing. At times, our brain can dig out random information to answer obscure questions at a pub quiz and at other times we can leave a supermarket with everything except the one item we went in to get, simply because we have forgotten.
There is a good reason why this can happen; if we look at the mentioned scenarios; in the former, our brain is focused on the task of retrieving information to answer the next question. In the latter, our brain has blocked out the key memory of that one product we shouldn’t forget to buy and that is because we have become distracted with the thousands of items on sale and the environment we have walked into.
Entering the trading world is not so different; our brain can also become distracted and overly stimulated with all the fast moving prices, charts and alerts flashing at us which based on the given example can lead to forgetting the most important elements we must remember to succeed in trading.
What does one do to avoid such memory blocks which can lead to significant loss? I strongly believe the solution to this problem is something every trader should have and that is a diary. Not the “dear diary” kind – although you are entitled to have that on the side too – but this diary is a record of all the trades you do including the reasons behind each trade and the outcome.
Here are the main benefits of a trading diary:
We can only learn from our mistakes, but that means we must remember those mistakes and their consequences. Memory can be very fleeting which is why we need accurate entries to keep a record of every step which lead to a successful or disastrous trade. Once you have a decent amount of records to look back at you will find two things:
- Find a pattern to the methods which seem to work for you (which decisions lead to success? Which one’s lead to failure?).
- Learn more about who you are as a trader (How do you react to certain market situations? Are you better at trading a particular currency pair or commodity?).
- Use your diary as a plan for how you will trade.
Remember the first time you looked at a trading platform? It can be quite intimidating. Even after you get used to it and master using it, your mind is still taking in a lot of information. The market watch with its hundreds of trading instruments, bid and ask prices and the spread next to each one of those instruments, and they are constantly changing. Charts showing us directions over several time frames, a number of different technical indicators which are also fluctuating. Market news is flashing up at us announcing the latest economic data and market alerts and throwing the highs and lows at us. Even reading all of this must have gotten your eyes and brain tired.
Although all these elements can assist your trading it doesn’t mean they can’t be distracting and have your mind jumping from one piece of information to the next, sometimes forgetting the most important elements you need to succeed. If you do not have your main points clearly written down to give you clarity, when you are overwhelmed then you may very well forget that special element.
Last but not least, is discipline. Ok, we hear this word often branded around, but what does it really mean? In this case discipline means control of one’s emotions and the use of reason to decide on the best course of action. Discipline is also according to the Oxford dictionary “…controlled behavior resulting from…. training” and “a system of rules of conduct”.
The discipline is not just in sticking to updating your diary on a daily basis, but to be disciplined in following and using everything you have in your diary to stick to a plan and avoid the excitement of trading.
Let’s create a trader’s diary
The key is to fill up most of the columns of the diary before starting to trade, and follow those points which were put down when you were clear minded before the element of excitement.
Your trader’s diary should contain the following columns:
- Open date
- Entry Level
- Long/ short
- Contract size
- stop loss level
- take profit level
- Reason’s you have decided the trade
- the date the trade closed and the outcome
Let’s fill them up with a fictional example:
Date: 20th May 2017
Entry Level: 1.05809
Contract size: 1 Lot
Stop loss: 1.05609
Take profit: 1.06209
Reasons: Mario Draghi has been very hawkish in his previous news conference and a higher CPI for EU yesterday and Mario is set to speak today there may be an opportunity. Plus, EURUSD is currently trading above the 50-day MA, with the Bollinger bands showing a potential support at 1.05589 and a potential resistance at 1.06259.
Closed date: 20th May 2017.
Result: Take profit hit, 40 pips = $400 profit.
Obviously, the result column cannot be completed till after the trade has been placed and the outcome reached, but if you take the time to complete all the other columns before you enter a trade you are more likely to avoid making rushed and wrong decisions.
A trading diary is not a guarantee for success on its own, but the major difference between a successful trader and unsuccessful trader is that 99% of successful traders develop a trading plan and by learning from mistakes, remaining focused and becoming disciplined you will be a step closer to developing your own plan.