Why the trading journal is the holy grail in trading?

Knowing precisely what your trading plan is and making an objective analysis after a trade is closed are the most important things when trading.

“It is emotionally difficult to review your mistakes since the speculator must wade through his own bad trades and blunders. And these are not just simple blunders; these are blunders that cost money. Anyone who has lost money by investing poorly knows how difficult it is to re-examine what occurred. The examination of a losing trade is tortuous but necessary to ensure that it will not happen again.” Jesse Livermore

Top traders are all disciplined and consistent, but one element that a lot of them share is the habit of keeping a trading journal.

I personally discovered my biggest mistakes only after I filled in every trade I was about to take. The trading log is the most useful tool in analyzing trader behavior. It is possible to identify repetitive mistakes that would otherwise not be noticed because the human mind works according to a certain pattern and force us to make decisions that are considered ‘normal’.

Brett Steenbarger said that the “trading journal keeps you constructive, keeps you learning, and keeps you working on the things that are most important. It is not a tool for simply rehashing the day; it is a tool for self-development”.

There are a lot of ways to analyze your trades, many companies offer their way of analyzing. In a way it is good, but my advice is to build your own. Of course, it is OK to get inspired, but I emphasize the importance of choosing what really matters for you, do not overcomplicate the process, if it’s too hard to do, it might become a scary task.

I will show now how I did it based on my needs. Please be free to use these directions and use or adjust whatever is useful for you. Here are data to put in columns in an Excel sheet:

1. Basic information

Date: date the position was opened (for some trades, time could be added - you might find out, for example, that 90% of trades that were opened within the first half-hour of the stock exchange opening had a negative result, etc.).
Ticker: the symbol of the stock, ETF, etc. Some traders also add the exchange on which the stock is traded.
Idea: it is fine to get inspired from other sources (social media, friends, etc.) but never copy the trading decision! The decision will only be made after your own due diligence. The purpose of this information is to see the source of good ideas. Or mark it as “my idea”.
Earnings Date: in Excel, you can implement a rule of this information when you are 2–3 days away from the quarterly financial results. Depending on the status of the position/market/profit made/price level vs. support or averages, etc., the trader decides whether to keep the position — fully or partially — during the publication of the results.
Trading Pattern: note the type of trading pattern identified. I remind the importance of identifying a pattern in the trading decision. A reason can also be given if it is a special case. If no pattern is identified, this step should lead to a rethinking of the approach or even to stopping the trading decision.

2. Planned actions

(during the weekend or before the market opens)

Entry: the desired entry value, the price you want to pay for a share. The recommended method is using a Buy Stop Limit Order if long, above a preset value, but no higher than a limit. Or a Sell Stop Limit Order if selling short under a preset price but no less than a limit).
Transaction Type: long or short selling
Stop Loss: price at which the trader wants to exit the position if the price does not move in the desired direction. It must be put at strong support or at least a main average. Please consider using a maximum 5-7% risk.

“Love your stops, not your stocks” Dan Zanger

Potential: the value at which the share price should reach taking into account both the market environment and the technical pattern. It is not an actual target, but this value should make sense and should be at least twice the difference between Entry and Stop Loss, i.e. the potential profit should be at least twice the risk.
RR: risk-reward will be automatically calculated in Excel as follows: (Potential minus Entry)/(Entry minus Stop Loss). Theoretically, the trade is worthwhile if this value is greater than 1. But practically, we need a higher value, minimum 2, ideally 3 to build a solid profit that can cover the risk of negative trades.
Maximum number of shares that can be bought/sold will be calculated automatically. If the share price is $99, the desired entry is at $100, the Stop Loss is set in advance to a solid support at $95, and the risk set for the trade is $50, then the maximum number of shares that can be traded is 50/(100–95) = 10. The maximum number of shares is influenced by the risk, the distance between the entry price and the Stop Loss, not the share price.

3. Transactions

Realized entry price: the price at which the transaction was really placed. Most of the time it differs from the planned one due to market volatility, spread, slippage, fat fingers, but it should be within the accepted limit. If it does not go according to plan, the trader can take the decision to exit the trade immediately.
Number of shares: this value may differ from the one in the planning stage if the trader decides to round down the number of shares or take a smaller position (1/2 or 1/3 of the test) if there are elements that have changed in the market.
Current price: this is the current price retrieval in Excel (see Date menu and then Stocks). Be careful, there is a 15-minute delay between the displayed price and the actual price. Automated fill, no input here.
Percentage: a percentage calculation formula will be displayed for the realized profit. Automated formula based on Entry and Current Price, no input here.
Actual Stop Loss: the Stop Loss will be adjusted continuously according to the price evolution or when better new support in the direction for the trade is identified (for long positions) or new resistance (for short positions).
Heat: this is the risk taken if the trade is to close suddenly due to an unexpected event (the value of the heat will always be negative), calculated at the risk unit level as the difference between the Stop Loss and the current price and divided by the value of one risk unit. The result will be multiplied by the number of shares held. The risk unit is set at the beginning of the trade and it is equal to the risk taken on a transaction. The objective of this indicator is to see the degree of freedom the stock has, how much it can move to the bottom. If a trader would notice that the price has advanced a lot and the heat shows R=10, he could decide to tighten the Stop Loss but in such a way that it does not block the stock’s movement and close it by chocking it. After the stock has moved into profit, one can leave the R-value greater than 1. The reason for using the notion of R as opposed to the dollar amount at risk is to get the trader to think in terms of gameplay and number of bets, winning or not, as opposed to thinking in terms of winning or losing money. If we have 10 shares bought at an initial price share of $80, the current price/share is $100, the risk unit (R) is $50, and the Stop Loss is now $95, then the heat will be: [(95–100)/50]*10 = -1R (i.e. -$50, that’s how much the trader can lose if the trade is closed at Stop Loss).
R: the number of risk units obtained so far. The value of R can be either positive or negative, depending on the outcome of the trade. It is calculated as the difference between the current price minus the initial price, all divided by the risk unit. All to be multiplied by the number of shares held. Using the data from the previous example, the R will be: [(100–80)/50]*10 = 4R (in other words, the trader has earned 4x$50 = $200 so far on this trade).

4. Exiting the trade

Price of the first exit (if the sale is total, only this column and the next one will be filled in)
Number of shares on the first exit
Price on the second exit
Number of shares on the second exit
Price at the third exit
Number of shares at the third exit
… continue if the approach is to have more than three partials.

5. Analysis

Status: it will appear if the transaction is Open or totally Closed
Rs: Total R obtained (if the transaction is partially closed, then only the R obtained from the partially sold shares will be shown)
Feedback: observations or other important elements during the transaction, like closed too early, news occurred, etc.
Kill the demon (actions to be taken to avoid repeating a mistake). Taking into account the above feedback, describe how you should react when faced with the same challenge again.

In addition to the table header described above, the Excel sheet will also contain some statistical data:

R: the value of the risk unit (R) per trade. This is to be set from the early beginning.
Total exposure at R level (there will be several trades opened, so the trader’s exposure will be the total amount in the R column in Part 3 (Transactions)
Total Heat: the total of the Heat column in Part 3 (Transactions)
Total number of trades in the current month
Number of transactions with a positive result
Number of transactions with a negative result
Batting Average: percentage of transactions with a positive result
Average profit per transaction expressed in R
Average loss per transaction expressed in R
R:R average gain value / average loss value (ignore the minus sign of the average loss value). Ideally, it should be at least 2.
Expectancy (Estimated profit per trade) expressed in R (total monthly R / number of trades made)
Total adjusted R (total R without broker fee, commissions, possible monthly trader expenses, etc.)

In addition, a Gaussian bell plot can be used to see the distribution of the number of transactions over 0.1R intervals. For example: in the range -1R to -0.9R, there were 5 transactions, in the range -0.9R to -0.8R there were 3 transactions and continuing to >+10R. Thus, you can see statistics running for the size of the gains, respective to the losses from the transactions.

“If you can’t measure it, you probably can’t manage it. Things you measure tend to improve”. Ed Seykota

These are the indicators that I use and this is my holy grail. Trading Journal helps me to discover those mistakes and forces me to think about how to get rid of them and not repeat them.

You may adjust the list as per your own desires and needs. I suggest not adding too many other indicators, it will be too much data to analyze. Focus on what’s works for you.

A trading journal is probably the most important and most often neglected, tool in determining your success or failure in the market. Make a trading journal your first trading habit. It will become the key to all your good trades in the future!