If you trade or invest in stocks or other financial instruments and don't keep a journal, let me try to convince you to start. Keeping a trade journal is a little work, but the payoff will be worth it.
The number one reason to keep a journal is accountability. Telling someone you are going to do something makes you accountable. That person can then call you out if you don't follow through on your word. No one wants to be known for not keeping their word, and that is why it can help you achieve your goals. By keeping a journal you are holding yourself accountable to yourself.
If you don’t record your trades you can pretend like they never happened. This is especially true for painful losses. Lying to others is one thing, but lying to yourself is going to cause all kinds of psychological problems. You need a clear head to trade, and keeping yourself honest can help achieve this.
3. No Two Trades are the Same
Just like snowflakes, all stocks have unique patterns. General movements are very similar though. You can get a feel for the different ways a trade may go. Use this to your advantage so you don’t get taken by surprise. The more trades you experience and remember, the less likely a trade in the future will do something that will cause you to panic. Of course, you can never completely get rid of the unknown as explained in the book The Black Swan.
4. Analyze Success and Failure
There are times when every trader goes on a winning streak. You can look at these times and see what you did. Try to remember the ways you were thinking and executing your trades. Were you Trading in the Zone, as author Mark Douglas puts it? It may have just been luck, the same way when flipping a coin it can land heads 10 times in a row. If nothing else, looking at winners it is a great way to increase motivation.
There will be times when you faultered and did not stay disciplined in your strategy. Record it and learn from it. Go back and revisit your errors now and again. Get it ingrained in your mind not to repeat these mistakes. Do not run away from your failures. Absorb them.
Your trade journal has your actual historical data on your strategy, not hypothetical back tests. Plus, this data is available to you for free. Why would you not want to analyze it?
If you have a statistically significant number of trades you can calculate your expectancy. Once you have this, you can adjust your risk structure to optimize your trading profits.
6. Collecting Trophies
If you are a fan of the show Dexter, then you will understand this picture. It is Dexter’s victim’s blood slides, his kills, his trophies. To me a trade journal is a similar kind of thing. There is a saying, “Traders eat what they kill.” Your trades are your kills, and your journal is your collection. The benefit of this is it keeps you motivated to continue getting more trades in your collection. Video games use this same technique by encouraging players to earn collectible achievements. It is a very powerful motivator.
7. Looking Back
You can look back on old trades and see where they would have gone if you had not exited. Little tweaks could drastically effect your trading results. For example, if the vast majority of your trades hit your stop loss and then immediately continued in your direction. Perhaps you should loosen your stops.
Make sure you avoid focusing on individual trades, wallowing in what could have been. There is a whole subject of study on this and its negative effects called regret theory.
8. Ah-ha! Moments
When you undergo any endeavour there are moments of clarity where you make a breakthrough in thought. It is possible that you might have one of these moments when looking through old trades. Or maybe you have had an ah-ha moment, and now you want at your view old trades through this new perspective.
Keeping a journal is like taking a microscope to your trade strategy. If your account value is growing, you are getting a general idea that your strategy is working. It is nice to take a closer look and see the impact of individual trades though, as well as all your trades as a whole. It is a form of strategy verification and builds confidence. It can also help to reassure you in drawdowns.
Routinely keeping a journal builds self discipline. Every time you take a trade you record it. Building discipline in doing little things like this will get you one step closer to self-mastery. So when a time comes when you need to have strict control and take immediate action, you will have trained.