Updated from its original posting: 14 Oct 2011
Much has been said about the importance of mastering your trading psychology. And though there are many different ways to accomplish this goal, perhaps the most practical and effective way of doing so is by keeping a psychological trade journal.
Used properly, a psychological trade journal can help you track your behavioral tendencies and their usual outcomes. This is important because being aware of these patterns can help you pinpoint your sources of distress.
As they say, "Knowing is half the battle." Once you have knowledge of what causes distress, you can make the proper adjustments to keep negative situations from affecting your account.
Of course, to get an edge in the markets, it's not enough that you keep a psychological trading journal. You must also use it properly. Brett Steenbarger, a well-respected trading psychologist, gives us three tips on how to make the most out of trading journals.
1. Be goal-oriented
Jotting down observations is helpful but, unless you act on them, they will be nothing but observations. You must turn your observations into simple, concrete goals. If you noted a trading mistake, you should determine what you should've done differently and turn that into your goal for the next day.
It will do you no good to dwell on your mistakes and negative thoughts. Instead, focus your efforts on how to overcome the same negative situations in the future. For example, if you find that you get trigger-happy and tend to overtrade after experiencing a couple of wins, make it your goal to keep your hands in your pockets and be more prudent the next time you find yourself on a winning streak.
2. Balance the negatives and positives
It's common for traders to write about what they did wrong or what they missed especially when writing about a losing trade. But if that's all that your journal entry contains, the odds are you will wind up feeling frustrated when you review your trading journal and read about all the mistakes you've made.
Instead of focusing solely on the things that you did wrong, dedicate a part of your journal entry to what you did right and what's working for you. It can be as simple as acknowledging that your analysis was correct or that you managed to cut your losses in time.
Too much negativity in your journal entries can be damaging to your trading confidence in the long run so it'd help to balance it out with some positive thoughts on your trading. Write about both your strengths and weaknesses so that you can use your journal to enhance your trading performance.
3. Focus on learning
Aside from writing about your thought process during the trade, you should also identify the lessons you learned so you know how to react to the same situation when it repeats itself. By putting these thoughts down in words, there's a better chance of remembering these lessons and applying them next time.
For instance, you can take note of how you could've played the trade better or how you could've pressed your advantage by adding to your position. You can also write about which technical or fundamental signals could've allowed you to exit early and cut your losses.
Of course you can't guarantee that these lessons or rules will result in profits the next time you apply them to a trade, but they will help you get an edge in the markets. By doing so, you can make sure that each trading day provides an opportunity for learning and growth whether or not you were profitable for the day.
There you have it, folks! I hope you enjoyed those simple yet effective tips on how to make the most out of your psychological trading journal. Little by little, these changes can do wonders for your trading psychology and your trading account as well.
If you're looking for a place to jot down your trading observations and decisions, just drop by MeetPips.com, create an account, and journal away! You can also put your trading journal in the BabyPips.com forums by starting a new thread in the Trade Journal section. Hope to see you there!
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