Day traders all go through a long learning curve as they transition from novice to professional abilities. It is unavoidable that a new trader will make mistakes, and it is even an important part of the learning process. The key to becoming consistently profitable, and reducing the time it takes to reach this level of success, is to minimize how often mistakes are repeated. Repeating mistakes is the most common obstacle preventing traders from attaining their goals. If you want to be a professional day trader, you must develop a strategy to avoid making the same mistakes over and over, and consistently develop your skills.
The best way to do this on a daily basis is to keep a trading journal. What is a trading journal? A trading journal is like a diary, it keeps a record of each trading day. It details exactly what you did well and exactly what you did wrong. Over time this will help you spot trends in your trading, trends in what you do well, and trends of common mistakes that you make. A trading journal will also improve your efficiency, help you master your emotions, identify the trade setups that are most profitable for you, and give you a framework to improve your profitability. How exactly do you develop this trading journal, and what is the best way to maximize its effectiveness?
A trading journal is not hard to develop, but you must be very honest with yourself, and you must be very consistent recording each day’s entry. Start by bringing up your trade blotter at the end of each day. Use this with a chart to review and remember each trade that you took throughout the day. Start by writing what you saw that interested you in each trade in the first place.
Look at where you entered and where you exited the trade. Could you reasonably have improved these points based upon the information you had at that time? Be very honest here. Sometimes the answer is no, but for new traders more often than not there was some aspect of the actual personal execution of the trade that could be improved upon. Think back to your emotions at the time. Did they help you? Did they get in the way of you making a logical decision? The vast majority of times you will find that emotions hinder your logical decision making processes.
It is very important to remember your emotions. The most difficult part of becoming successful for most new day traders is not the learning or understanding of a strategy. What stands in their way is allowing their emotions to influence how well they adhere to their planning and processing of information. In your journal don’t just stop at remembering what your emotions were. If all we know is that we were elated and it caused a decision to become more aggressive than was logical given the situation, it does very little to prevent feeling this kind of elation, and therefore mistake in the future. Write down why you were so elated. Did you previously have 3 profitable trades in a row, were you way up on your day, or was their some influence outside of trading such as family or personal matters affecting your emotions?
By writing down not just what your emotions were, but also the reasons underlying the emotion, it allows you to more effectively identify and short circuit potential emotional pitfalls in the future. This is how a trader improves, and how a trader reaches consistent profitability. Following a trading strategy is not an emotional decision. The most successful traders think and act only based on probabilities. Be sure to include in your journal any emotions that prevented you from taking a good trade as well. This is an opportunity cost the same way mishandling a trade is.
A trading journal is not just about emotions, however. You also must detail the trade set ups that worked very well for you, and the trade set ups that did not. Traders will commonly fall into a trap where they think that a trade set-up is consistently profitable for them, but in reality it is not. Write down trade set ups that ended up being a waste of your time. Be sure to include things in your writing such as hot key errors, technical glitches or equipment malfunction, and even reasons that you were away from your computer during profitable trading hours. It is very easy to rationalize reasons for not making money while trading, but the reality is you are responsible for controlling and improving every variable that affects your trading.
At the end of each day right down the biggest takeaways from the day. Remember that the journal is a record of your successes and failures. What mistake do you most wish you could correct? What did you do very well that you would like to continue to do? Over time this will allow you to see common errors that you make, and it will help you identify the most probable trade set ups to deliver positive results.
A trading journal should also be reviewed each morning before trading starts. Read the previous days entry and key points from past entries. This will ensure that the information is fresh in your mind at all times as you trade. Remember that you have one goal when you are trading, and that is to be as profitable as you possibly can be. Having information at your fingertips but not utilizing it because it was not on your mind at the time it was needed most is a mistake for which a trader has no excuse to make. The only way a journal is valuable is if you are actively making an effort to follow your own ideas for improving.
If you are bluntly honest and diligent in keeping your journal, you will never struggle to systematically develop strategies to improve your trading profitability.