Why using a trading diary can help improve your trading

Trading diaries are basic yet important part of being a successful trader. Most traders spend the majority of their time scrutinizing trades before they enter them. And of course, this time is well spent, but this is only the beginning of the journey. Recording your trading transactions is just as important. You might ask yourself, why do I spend so much time scrutinizing, examining and dissecting the history of a stock before I enter it? After answering those questions, you should notice, that the answers are just as important after the trade has been closed. Actually they are even more important! Why? It has to do with the scientific method. You probably recall learning about this from your school days in science class. It is basically a four step protocol to solving a problem. We though, are only concerned about the first three. 1. Observation and description of a phenomenon. 2. Formulation of an hypothesis to explain the phenomena. 3. Use of the hypothesis to predict quantitatively the results of new observations. Before entering a long trade, we have a belief that the price will go up. This is based upon step one of the scientific method. We believe we have seen this pattern before and it is a precursor to rising prices. You may or may not care about step number two (why this happens). Step three however, is very important. We want to verify if our hypothesis was correct. Otherwise our hypothesis might be incorrect and we might be repeating the same mistake over and over. So to review the results of our observations we need a trading diary. This will confirm if we are headed in the right direction or if we need to change our course. What should it contain? Basic information should include: No stocks/shares Buy date and price Sell date and price Profit/loss Entry strategy Exit Strategy Comments It is pretty self explanatory. It basically tracks the details of your trades. The last two entries, “Entry Strategy” & “Exit Strategy” are the essential parts of this form. This is where you document the reasons why you decided to open the trade and why you decided to close the trade. Depending on how you make these decisions, you might make a small note or you may need to use a code of some sort to indicate lengthier explanations recorded on another page. Next, at the end of every month or throughout the month, you review the results of your trading as it relates to the decisions you made going in and out. If you are not used to doing this, you may be surprised what it will reveal to you, especially once you have more than a few trades to review. This method is key to improving your trading skills. James Ramsay is a Private Trader and the developer of OTrader Investment Portfolio Management Software. Get a free 20 day trial and get your position sizing and trade management under control. portfolio-management-software.otrader.com.au