Over the last several weeks we’ve been mentioning both emotions and your trading diary quite often.
Although we’ve said that you should make notes and comments about your mental state during trading, we realized that we need to be a bit more specific about it. So here are some detailed steps on how to combine the emotional aspect of trading and creating a written record of it.
Let’s start with trends. Markets have them but so does every trader. Our human trends also have their directions and they manifest with repetitive actions that can turn into habits.
Practice does make perfect but what if we keep doing the same mistakes again without realizing exactly what they are. That’s where a journal comes in handy. It gives you another point of view and allows you to see yourself from another angle and intervene when you see a negative habit developing.
An example of a mistake that could be damaging to your trading is trading large and risky position sizes, that can quickly be lost.
You could think that always going for the big profit is the best way to make money, but if you do it four or five times in a row and lose your deposit every time.. then it would probably be better to take a look back at what you were thinking all those times when you deposited and lost it all in the blink of an eye.
So here are the actual steps that will help you look at things in retrospect:
1. Describe the situation
You can make entries in three situations: when you’re depositing, before opening a trade and before closing a trade.
Before depositing you could write why you’ve chosen that specific amount, what you aim to achieve and what percentage you plan to risk on every trade (remember, we recommend somewhere between 1-2%).
Before opening a trade you should write about the circumstances that make you confident this will be a winning trade. It could be an Elliott Wave finishing it’s run, or it could be an indicator signalling a buy or sell.
Same goes for closing a trade – write about the reasons you’re doing it.
2. Answer the question “What am I feeling right now?”
Are you confident? Is there a little speck of fear? Or are you nervous before taking action. Happy? Sad?
Describe it with your own words but make sure it’s honest. Coming back to these several sentences will help you learn both in winning and losing situations.
3. Record what happened next in your trading diary
After an initial action (depositing or opening a position) track its outcome.
Did a deposit lead to winnings and a withdrawal? Or did you lose part or all of it and have to deposit again. Compare what you’re feeling now to the moment you first put money in your account. Connect the dots between the two moments and use the full picture when you have to do it again.
For positions – focus on the emotional side of trading: did you feel pressure while the position was open? Did you close it earlier than you planned? Did you change the take-profit and stop-loss levels? Any changes in the position size?
If any of these happen – make a note of them! And try to write an answer to WHY you did it!
Finally, another little tip on where to write all these things down: just use another column in your trading diary. You could name it “comments”, “thoughts”, “psychology” or anything you like.
This whole behavior will allow you to become better at understanding your trading self and what it thinks and does when there’s pressure. And instead of relying only on pure experience and memories that fade away, you’ll be able to see exactly what you were thinking back then and improve.