Updated: Nov 3
The trading journal is the core of any trader’s toolbox. It’s the place where you can identify:
Your major weaknesses
Your major strengths
How well you are performing
Where to focus to improve the amount of money you make on trades!
Why you need a forex trading journal:
Your trading journal is the KEY to your trading success
Don't let the word "journal" confuse you into thinking its a place you just write a few lines about your trading decision and you're done! Contrary to popular belief, your journal needs a highly accurate number crunching system and must include these 3 features:
In this article, I will break down every component of the best trading journal there is, and how to make it yourself!
Before that though, let’s kick it off with the basics: what is a trading journal?
What is a trading Journal
In the simplest way possible, a trading journal is a place where you manage your trading portfolio and manage your self-control. Not only does it track your progress, but it also clearly identifies areas to improve your trading returns.
The trading journal has a historical log of your decisions, calculators to determine your current performance, and indicators to show you where you need to improve. (I'll show you how to access and use all this fancy stuff in this article...)
If you don't have a trading journal, it's impossible to consistently scale your trading account. Like with anything where you want to succeed, keeping a track record of everything is crucial.
An elite powerlifter uses journals to keep a log of what makes them stronger, what foods increase recovery, how different methods impact their results.
A mad scientist use journals to discover the undiscoverable.
Forex traders (the successful ones at least) use it to focus on their performance and pinpoint exact areas of improvement to increase profitability. It gives you a lot of those "ah-ha!" moments...
Some of these "ah-ha" moments include:
Exactly what's wrong with your risk management
Whether you're over-trading
The ideal amount to risk to maximise your return-on-investment
and much much more...
Benefits of a trading journal to increase profits
When you start trading, the worst feeling is a trade going wrong and not knowing why. The question looms over you, and inevitably causes you to make worse decisions over time... until all your money's gone.
One of the hardest truths to face is that no trader is perfect, and you're not perfect... I'm not perfect... no one is!
Mistakes are going to happen, and it's what you do after those mistakes that separates the winners from the losers
- a life lesson directly from my own experience.
When using a proper trading journal, all those questions of:
"why did that trade fail"
"why did it work after hitting my stop-loss"
are answered. The immense value of noticing whether it's your idea generation, risk management, or a bit of both that are holding you back... is what a trading journal solves.
I personally would not be where I am today without one! (Marcus btw, director of Logikfx).
With a journal you can identify how to eliminate the huge "drawdowns" when trading. Put simply, you'll easily be able to see what's causing you to lose money, and nip it in the bud.
If you are able to minimise your losses in this way, the profits will look after themselves. That's the trick to running a long-term consistent trading portfolio!
Journaling proves you're a good trader
You're making a bit of money trading, things are going well... and now you want to start getting investors or scaling your account. The problem is, how do they know you're any good? or how do you know if you're any good?
Your trading journal is the evidence that investors need before they give you a dime! Just making money alone isn't enough proof.
What makes you a good trader is knowing the risk you've taken in order to achieve those results. For example, if you risked all of your money on "black" at the roulette table and doubled your money,... would that make you a good trader?
If we just looked at the results (money made), you've made 100%... exceptional trading return Sir (or Madame).
But if we look at how you achieved that 100% return, you actually risked ALL of your money (or portfolio in trading)! All of a sudden this isn't a very attractive investment at all. If it goes wrong once, you're bust...what we call, gambling!
As a trader, your aim is to make a lot more money in return than you put on the table in the first place.
This is known as minimising your risk, so your trading is sustainable.
Let's now say you risked, maybe 2% to make 100%, this deal is a lot more attractive as you can be wrong 50 times in a row before your bust. This gives you a nice cushion to soften the fall each time you're wrong.
If you can prove to others that you're taking a small risk, and generating a steady return... then you can scale your trading account dramatically. It compounds itself, whether or not you seek additional investment. And yes, the only way to do this is with a well-kept journal that tracks the right information.
Example of a Bad Trading Journal
Any trading journal that is just a log of your trades, and how you were 'feeling' at the time when entering is not going to do you any justice in the long-run. Before writing this article I did a bit of research for myself what was out there already with regards, and I was not impressed. In fact, It's what actually drove me to create the content you're reading right now. I've broken this down into 3 red-flags...
3 signs of a bad trading journal
Generally speaking, if the trading journal is focusing too much on "non-measurable" things, it's not going to be any use to you in the future. Also, if it's measuring the wrong things it's also going to be useless.
A lot of the journals I've seen out there encourage you to track the following USELESS features:
The "time-frame" you're trading (useless measurement)
When you enter a trade, the time-frame you looked at doesn't impact the trades performance in the slightest. Time will always be time, you should be looking at the assets change in price over time. If you narrow yourself to only look at a few time-frames, your trading approach is heavily flawed.
The "setup" with "screenshots of the trading chart" (waste of time)
Your strategy shouldn't change trade-by-trade, so this doesn't need to be tracked if you know what you're doing. In fact, if you're tracking this on a trade-by-trade basis, you're probably already losing money as you don't have a proven edge!
The "Stop Loss" price/ distance (useless measurement)
Your stop-loss is already measured using your volatility measurements. Tracking this number doesn't really have any future value, as your stop-loss will change based upon volatility as time goes on. What really matters is the monetary value you actually lose/ make on particular positions!
The Entry Price and Exit Price of trades (already tracked in your brokerage)
All you really need is the floating margin of your portfolio and P&L of singular trades. Tracking irrelevant details, like entry price and exit price, is of no use to you to determine where to improve.
If you find yourself journaling in this way, let me show you what you really need to be doing if you're looking to scale your skills as a trader...
What does a good trading journal look like?
A good trading trading journal will have everything you need as a trader all in one place. This must include the following:
A watchlist - to build up a wide selection of trades before you actually trade them
Trade log - to log all of the returns on each trade you've actually entered to determine the Kelly criterion (we'll discuss more later why this is important!)
Performance - a complete deconstruction of your portfolio performance, from alpha right the way to success rates... the only way to pinpoint your flaws and successes.
But Marcus, how do I build all of these sheets? what software would you I to make one? The answer: Microsoft excel, or google sheets.
I've already built the ideal trading journal, and I'll show you exactly how to use it step-by-step below...
Ultimate trading Journal spreadsheet: Step-by-step
You'll be happy to know I've done all the hard work for you and uploaded the exact trading journal excel file I use every week.
You can download it right here. (psst use code: "JOURN99" to get it up to 99% off in the shop!)
This spreadsheet is something I couldn't live without and is everything you will ever need to manage your trades and portfolio.
Let's break down the trading journal spreadsheet, step-by-step so you know exactly how it works.
We'll start with the watchlist dashboard...
Spreadsheet 1: Forex Watchlist
The very first spreadsheet in the trading journal excel file is the watchlist sheet. This is where you can store all of your trade ideas whilst they're cooking up ready for lift off!
What is a forex watchlist?
A forex watchlist is a place where you list all of your trade ideas before you actually enter them. This list is something you're always adding to as market conditions change and new information comes available. Generally this should updated at least once per week.
Populating your watchlist is not as easy as "randomly" looking at currencies online, and picking the ones you think look cool... or 'juicy' like Bob and Jerry...
The real way is to actually look at what's going on in the economy, and calculating which currencies actually have a sensible reason to trade. By sensible, I'm referring to the idea: is there any valid reason to think we should buy this particular currency based on real economic report data?!
Simply put, you need to work out whether currency is 'strong' or 'weak' based upon how well it's economy is performing.
And guess what, you don't need to be an 'economist' or have a PHD in econometrics to get this done properly!
How to use the forex watchlist correctly
The watchlist spreadsheet is split into 2 main sections:
Trading Economics Analysis: Explained
Let's start of with understanding what to include in your Economic Analysis. There are 5 key things you need to consider in this section to get a full understanding of what is driving currency value and price:
Date - Input the date you add your economic analysis to the spreadsheet. This is important so you know exactly when your analysis is valid. Without a date we can't tell if that analysis has expired.
Economic Region - Input the economic region/ country you're analysing. This will help keep it nice and organised so its easy to find ideal currencies to trade quickly.
Macro Currency Strength - Input the macro currency score on each economy. You can either create these scores yourself by analysing each individual economic report, and combining them to determine if each currency is weak or strong... or use Logikfx's macro currency strength meter which does it all for you. This will tell you straight away which currency you want to buy, and which you want to sell based on fundamentals.
COT (Lev Funds) - Input the Commitments of Traders Report (COT Report) leverage funds (hedge funds) net positioning on the currency. This will tell you exactly what hedge funds are buying and selling and therefore if there is enough 'fuel' for the price of the currency to actually trend in the direction you want it to.
Political/ Economic Themes - Add the current political stance or theme currently occurring. Examples may include trade wars, or even global pandemics! This will tell you if global politics supports your analysis.
When you put it all together, it will look something like this:
Straight away, from the above example we can quickly see:
For the United States:
Macro currency scores = 52 (strong currency)
COT Report = Hedge funds Long (buying the USD)
They're currently in a 'war'
This translates as, we want to buy the U.S. dollar, but be cautious due to the war.
COT Report = Hedge funds Short (selling the Euro)
The central bank is decreasing interest rates!
This translates as, we want to sell the Euro, and the interest rate reduction supports this idea.
Very quickly now, we can conclude we would want to short (sell) EUR/USD and add this to our watchlist!
Note: these numbers are for illustration purposes, so don't go out and sell EURUSD right now!
This allows you to get an accurate reading of the currency strength, based upon economic data... meaning you don't have to spend hours researching tons of global reports yourself (lifesaver, honestly).
Once you've updated this section, you know which currencies you want to 'combine' together and trade. As mentioned before we want to:
Combine a strong currency with a weak currency to increase the amount of volatility we can capture (translated as: money we can make) on each trade!
This is where we start to add to our "watchlist" section...
Trading Watchlist: Explained
Remember, your watchlist is a list all of your trade ideas before you actually enter them. These are trades in a 'rough' format and are nothing more than ideas at this point. No money is at risk.
This list is generated by combining strong currencies with weak ones, which your economic analysis should answer. Think of your watchlist as the result after filtering which currencies you want to trade...
You may notice in the above diagram a cool looking traffic light. This is the final stage between your "ideas" and a "live trade". It looks like this on your trading journal excel file:
Forex Pair - This is combination of 1 strong currency, and 1 weak currency creating a currency pairing. E.g. EURUSD, the Euro could be weak, and the USD could be strong.
Relative Score - This is derived from comparing the interest rate differentials, GDP (gross domestic product) differentials, imports and exports analysis and stock market returns. This is something that you can learn how to create in the currency trading masterclass.
COT (Lev Funds) - The first traffic light. If it agrees with the economic analysis, i.e. the hedge funds are also selling the euro, and buying the dollar - this would be a green light!
TA 1,2,3 etc... - Subsequent traffic lights of your choice. Generally these can be technical analysis features you consider 'useful' to supplement your trading decision.
The way these traffic lights work is as follows:
Red = Doesn't agree, wait
Amber = Neutral, wait
Green = agrees, enter position
And if all is satisfied, you are best prepared to enter a real position on the markets.
You've conducted a proper research on the economies, funnelled your ideas into tradable currency pairs and filtered them by checking the COT report and technicals.
You now have active trades... some winning, some losing.
And this is where the fun really begins... how to keep track of your trades, and critically analyse how you can make more profit.
Spreadsheet 2: Trade log
The second spreadsheet in the excel file is the Trade log. This is where you keep track of each trade individually, and the returns you make on them. It can be used in stocks or currencies, to determine how much RISK you should be taking on your trades.
The luxury of institutional traders, working in a fund, is they have a manager who tells them when they can increase or decrease their trade sizes (their risk).
As a retail trader, you don't have a boss to tell you when to increase your risk, or decrease it. Not to worry though, as it's not that difficult to work out, and I've made a simple template for you to follow.
Right now, I want you to imagine you've entered over 26 trades, applying proper economic research and filtering your ideas correctly. It's now time to measure how good you are. As you don't have a boss, this must be done yourself objectively to get a realistic understanding.
The way we do this is by using a formula, directly from probability theory known as the Kelly Criterion.
Kelly criterion explained
As a trader, you want to be invest more into yourself when you're winning, and do the opposite when losing.
The best way to gauge how to do this is by looking at historical trades you've entered, and use the Kelly criterion formula.
The Kelly criterion essentially tells us the optimal position size (as a % of your account) we should enter on our next trade, based on the historical performance of previous trades. A very powerful formula:
W = The probability that a trade will be winning... the historical success rate of your trades
(1-W) = The probability that a trade will be losing... the historical loss rate of your trades
R = The ratio of gain versus losses
The Kelly criterion first came around 90's, designed around horse betting. Gamblers actually used this to add a bit of 'logic' to their gambling habits... which I am definitely not advising btw. Gamblers and traders are two different species in my eyes!
Traders have now adapted this to be used for managing their risk, and it works extremely well once you've built up a list of historical trades.
Of course, you can't use the Kelly criterion right away, as you won't have any positions when you start out - but as you become more experienced it is imperative that it is used!
How to use Kelly criterion in the Ultimate Trading Journal
The first step is to populate your historical trades:
If we break this down simply there are 4 columns:
Trade = The count of your trades chronologically
Closing date = When you closed the trade
Symbol = The asset you traded (forex, stocks, bonds...chickens)
Net $ = The total gain or loss on the trade
Once you've populated this section, the second step is done for you.
The formulas in the template will automatically do all the hard work for you and produce your Kelly criterion:
And in this example (of completely made up numbers) the Kelly criterion is telling us that the optimal position size would be 25.82% on our next trade.
Take this with caution. This doesn't mean you should risk that EXACT amount, but it's more of a guide that you can increase your risk slightly from it's current level.
For example, if you're currently risking 0.5% of your margin per position, and your Kelly comes out at 25%, you may consider increasing the risk on your next trade to 1.5%.
Spreadsheet 3: Performance Dashboard
The third and final spreadsheet in the trading journal excel file is the performance dashboard. This is where you track the performance of all your trading activity. This is super important if you want to increase how profitable you are as a trader!
This dashboard will tell you where you strengths and weaknesses lie as a trader - which then helps you make better decisions as a trader.
The performance dashboard will automatically tell you the following with in-build formulas your:
Margin growth - plotted on a pretty chart
Net gain (%)
Annualised return (%)
Monthly average return (%)
Annualised standard deviation
Annualised downside standard deviation
In order to get the results for these all you have to input is these 3 things:
Starting balance (or margin)
Your weekly margin
Risk free rate
S&P Benchmark returns
Now you're probably wondering, what do all of these mean Marcus?! and why do I even care.
Very good question - and I will explain the most important performance metrics so you know exactly how to draw effective conclusions, and improve your trading from them!
Sharpe ratio explained
The Sharpe ratio looks at our annualised return in comparison to the risk-free rate as a factor of our standard deviation. Or in simpler terms: Sharpe ratio tells us our return on capital compared to the risk we took to get that return.
The Sharpe ratio originally was invented by William F. Sharpe, who is an American economist (Nobel prize winner for Economic Sciences) and is calculated as follows:
The formula can be split into two steps:
Take the 'risk free rate' away from the return of your portfolio.
Divide your answer by the volatility of your portfolio (standard deviation).
The risk free rate is an asset that we're pretty much guaranteed to get the return on. This 'guarantee' doesn't really exist in the world, but the closest thing to it is the U.S. treasury bond, and you can find the most recent data here.
What is a good Sharpe ratio?
Generally speaking a Sharpe ratio above 1 means you're doing good. If it's above 2 you're doing pretty great and actually outperforming many other traders out there!
The reason why a ratio greater than 1 is considered good is because this essentially means your portfolio returns are greater than the volatility of the portfolio. It means your approach to the market will be profitable over the long-run.
Sharpe ratio is very useful for telling you if the risk you're taking is sensible in terms of the return you're getting. It tells you if you're a gambler or a trader!
Sortino ratio explained
The Sortino ratio, is a variation of the Sharpe ratio, which I'd argue is slightly more accurate. It's different as it just looks at the 'negative' volatility.
The idea behind just the negative volatility, is that its the only volatility that counts as risk, is the one that would lose you money... which makes a lot of sense.
It's the same as the Sharpe ratio, just replace the deviation number, with the downside deviation.
The Sortino is a very useful way to gauge your return on investment given how much 'bad' or 'negative' risk you're taking.
A Sortino ratio above 2 is considered good, and above 3 is considered excellent. The higher the better! It means your portfolio is earning more money per unit of downside risk you're taking.
Trading Journal - Summary
To summarise, the ultimate trading journal helps get the best trading results out of yourself... but not all journals are made equal. A good trading journal must include:
A watchlist to keep track of all your trade ideas, and why you think they're even good ideas. Validate all your trades to eliminate the guessing game.
A log of all your trades, and their individual return to calculate optimal position sizing through the Kelly criterion
A performance dashboard with all the professional performance metrics to determine what part of you trading approach needs tweaking to increase your profits!
And to close, always ask yourself this:
If you were a millionaire looking to invest your money into a person, fund, or asset... would you blindly invest if they had no proof that they knew what they were doing?
If the answer is no, you my-friend MUST keep a trading journal at all costs!
Trading Journal Forex Download
Now this journal is multi-purpose, not only can it be used to track your forex portfolio, but also your equities one too! this really is the best trading journal for any trader...
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