By Darren Sinden, market commentator at Admiral Markets
Long-term profitability in Forex often depends on a trader’s organisation and discipline. A significant part of this is sticking by a comprehensive trading plan, which is essentially a document that outlines a trader’s overarching strategies, optimum entry and exit points, along with risk management rules.
So how does a Forex trader hold themselves accountable to such a plan? The answer lies in a Forex trading diary – another written document which records placed trades and their results. A Forex trading diary is useful, because it allows traders to look back retrospectively at the trades they have placed.
The reasons to keep a Forex trading diary
One of the main reasons people use a Forex diary is to increase the consistency of their overall approach to trading. By documenting every trade that is placed, traders can do two things. Firstly, they will be able to identify periods when they have deviated from their chosen strategy’s conditions and rules; such periods usually result in less profitable results. Secondly, they will be able to see the effectiveness of their chosen strategy across a batch of trades in terms of profitability. Both of these actions should encourage the majority of traders to become more consistent in their trading approach. In other words, they should be able to identify that their most profitable trades tend to come when they stick to their trading strategy closely. If this isn’t the case, it suggests that the trading strategy needs to be altered.
Another reason to keep a Forex trading diary is accountability. Some traders may keep their Forex trading diary private, simply so they can review it themselves. Others may be more open and show other traders their Forex trading diary for direct feedback. This is something that is encouraged by Admiral Markets’ educational experts, as peer support is one of the most effective ways of gaining authoritative insights into trading performance.
Traders who don’t keep and review their diaries can struggle to spot what aspects of their trading are holding them back. The simple act of recording trades rectifies this problem. With that in mind, let’s explore what traders should document their Forex trading diaries.
Items to include in a Forex trading diary
There are some things traders should take into consideration when creating a Forex trading diary. Firstly, they need to have a written trading plan which outlines their favoured strategies, target profit levels and risk management rules. This plan should match a trader’s time resource and preferences on risk aversion.
One of the primary components of a Forex trading diary is an individual’s trade history. This is essentially the mechanics of every trade that has been placed. Such as the currency pair, date open, date close, position size, entry price, stop loss level, take profit level, exit price, along with total profit or loss. A simple spreadsheet is useful to record such data.
Traders also need to understand and frame the markets in their diaries, as this helps qualify why certain trading decisions have been made. It’s also useful because traders will be able to see whether their market observations have led to profitable decisions when it comes to placing trades. As traders make a habit of recording their market observations, they will start to recognise regular opportunities (around certain economic news events) which they can take advantage of.
Finally, all mistakes should also be recorded in a trader’s Forex diary. Just because a trade isn’t profitable, it doesn’t mean that there isn’t a positive lesson to take from it. So traders must be sure to leave space on their spreadsheet to leave brief comments on mistakes they might have made.