Lessons From A Trader''s Diary

By Boris Schlossberg, Senior Currency Strategist

Almost every successful businessman will tell you that record keeping is critical to running an efficient business. Whether designing sophisticated aeronautics or simply selling scented soap, all businesses record and analyze their transactions to refine and optimize execution. When it comes to trading FX, however, very few traders diligently record and review their trades. FX trading, with its instantly dealable rates and self-organizing accounting software, makes it easy to forsake the discipline of keeping a trading diary. Yet a diary can improve a trader''s performance far more than any piece of advanced technical analysis software or even a $2,000-per-day trading seminar. This article will outline what to record in your journal and will provide an example from the writer''s own trading diary.

Why is keeping a trading diary so valuable? First, as human beings with faulty memories, we simply forget many of the circumstances surrounding our best and worst trades and, as a result, we learn little from them if they are not recorded. Second, the gap between what we think we do and what we actually do during trading can be embarrassingly large - a problem that can easily be identified with proper note taking. Finally, the mere act of keeping a diary introduces a methodical element to trading that prevents us from trading randomly and impulsively - the culprit behind most trading disasters.

Keeping a diary need not be cumbersome or complicated. Here is a list of three key issues that should be covered in every Trade:

1. What did you trade and why?
The reason for a trade can be either fundamental or technical (preferably both), but there must be a reason. Too many retail traders put on a trade because they think that prices have either risen or fallen "enough", without any technical or fundamental justification for their opinions. Worse, many traders get into positions out of sheer boredom, forcing a trade and then spending the rest of the time trying to justify it. Even if boredom is the primary driver for the trade, having a diary will make the trader record that fact and he or she will be able to see the consequences of such behavior.

2. Where is your stop and limit and why?
It is astonishing how many traders get into a trade without any clear idea of where to take a profit or when to get out if the trade moves against them. However, by writing down specific stop and limit orders, the trader consciously plans ahead for any contingency that may occur. Even if a trader disregards the initial stop in the heat of the battle, the act of recording all of that activity will be invaluable in doing post-trade analysis and enforcing better discipline on the next trade.

3. Did the trade work out as planned?
There is often an enormous gap between how the trade setup looks on charts or through the prism of backtesting software and the emotional reality of having money at risk. Comparing the difference between the two can help traders understand their strengths and weaknesses and improve long-term performance.

Because trading is such a visual craft, attaching a chart with annotations will complete the diary process by providing a pictorial reference point for further study.

Conclusion
The act of maintaining a diary crystallized my dominant behavioral patterns, clearly showing that I am not capable of holding most of my positions long enough to achieve a 2:1 risk/reward pattern. In my case, it is even more critical to choose only the highest probability setups that have an expectancy rate of better than 60% in order for my trading to succeed.

For other (more patient) traders, the diary process may reveal that they should expand their risk parameters in order to allow for the possibility of capturing larger gains. Regardless of the conclusion, the process of diary writing reveals the true human nature of trading tose clean, crisp charts and the coldly efficient results of backtesting systems simply cannot convey. It also demonstrates why computerized systems have such a difficult time trading markets. In fact, I have witnessed the results of hundreds of systems trade in real time and not one of them was profitable in the long term. Trading requires all of our emotional and analytical capabilities in order to produce success. The act of keeping a trading diary helps us better understand the demons that drive us and, in turn, makes us better traders.