Trade Journaling: When Will You Need It?

Published on: March 14, 2022

If there’s one thing that almost all traders fail to take care of in their journey it’s…

themselves!

It’s really up to you if you want trading to be a series of failures, on the path to profit. Or if you make it  a series of wins. Think about it – for most, the goal is profit and this state of “profitable” is what they consider success and anything on the way is a failed state.

But what if you improved your win rates? Started to let your winners run longer? Stopped taking off-plan trades? These might not land you in profit on their own – but they are improvements, and giving yourself a pat on the back for improving is a HEALTHY thing. 

Even rats know this. We could learn a few things from rats about booking some wins along the way (go to 1:00)…

Rats Play Fair Jordan Peterson

If big rats need to let little rats win “fighting games” 30% of the time, so the little rat doesn’t get bored of playing – what does that say about you needing to book a few wins? About not making it a constant state of fail?

Now – I don’t mean winning trades. I mean anything that you recognize as moving forwards, getting better. Like not making any off-plan trades for a month. That is progress.  So when we come to talking about journaling in trading, you want to make it a positive experience. Part of this is ensuring you are journaling at the right time, with the right expectations.

For most, the first few months of trading are a bit of a whirlwind. So many markets, so many techniques, so many changes, and so much trial and error. This is fine, but it’s not the time to be journaling your trades. Apart from the fact you feel like you are juggling 100 things when trying to trade, it’s not going to be of benefit and you’ll tire of it.

As you move forward, you’ll settle on a set of techniques/markets – or attempt to. This is when many traders start a perpetual cycle of trial and error. They find something – it works – then it stops working – or at least, that’s what it looks like.

But what if it didn’t stop working?

We’ve talked about this a lot. Techniques that work in one set of market conditions might not work in another. That doesn’t mean you throw them away and forget them forever – because the market cycles through different states. The markets behaved a certain way during Brexit and then when COVID hit.

So, you go past “nothing works” to “nothing works for long” until you start to build the skill of fine-tuning your trades to adjust for current market conditions. 

Nothing works for long – till you have a trade journal…

A trade journal is just a tool in your trader improvement arsenal. It’ll work once there is some consistency in your approach. Now – some people have an idea that discretionary trading is just absorbing the “feel” of the market and trading just that feel. This is hard to work with because each trade is different, it’s 100% gut. Discretionary trading is flexible, but you still need rules (see here for how you build discretionary rules: https://www.jigsawtrading.com/trading-group-therapy-discretionary-trading-0).

Slice and Dice

Let’s say that from your perspective, you have decided that for your current market you have some range trades and pullback trades. The range trades will need a certain market state – a slow range, possibly mid-trend but maybe an afternoon malaise where it’s just stuck in the morning range and doing very little. Each time you take a trade you note the type of trade and the conditions. In Journalytix you can do this using “Trade Types” and/or “#Hashtags”.

What’s the point?

Well – there are a number of benefits of journaling:

1. Iron out your bad habits – your trading plan defines how you should trade but unless you are a robot, you probably stray off your plan.  This doesn’t mean you are actually doing it. Lots of traders get bored and take random punts at the market – quite often because the market starts moving without them and they feel they are missing. Introducing a trade tag of “#OffPlan” helps you reign in that behavior. Partly because taking that few seconds pause to reflect on your trade, helps to stop you from spiraling out of control. If you think that the next 30 seconds contains so much potential market opportunity, you couldn’t possibly stop to journal – then you definitely need to stop and journal! Other bad habits such as closing trades too early, letting your losers run can all be tracked and the impact of those trades analyzed to figure out how they are impacting your bottom line.
2. Continual Self-Improvement – Looking at your results and notes and the trades you took that day, you look at the trades you took and the way you managed them. Was this trade well managed? Am I leaving money on the table for this trade? Did I miss some trades?  Could I have reduced the number of losers? Is my win rate improving/deteriorating?
3. Temporarily Shelving a Setup – sometimes some setups will stop working. As of writing, the past 2 weeks have seen some really odd volatility on index futures. Taking a step back – looking at your trades and the charts, you’ll be more likely to see that on balance, this trade is being applied in a very different set of conditions. You might not see it in the heat of the moment. If you only have heat of the moment decisions – you might scrap it. After trading, with a cooler head – you might surmise that when the prior conditions return, so should the setup. 
4. Booking some wins – Reward yourself for improving. Nothing wrong with taking your wife out for a meal because you didn’t take an off-plan trade for a week. Finding glitches in your behavior is great – but you should also give yourself an attaboy for defeating a glitch. Keep doing that and one day you are going to wake up profitable. Give yourself some goals and rewards?

In other words – you start Journaling when your trading has reached a level of consistency. When you aren’t scrambling around looking for a set of techniques. Now you are trying to take a set of techniques live or improve them after going live.

Now you are ready to reap the benefits of a journal – so it’s going to pay off.

Recently, I spoke with a trader and asked how his week was, “Not great” he said – I looked at his stats and he had a healthy 70% win rate. He was quite surprised at that 70% and said “It felt like a battle, I thought I was well below that”.

The fact is, in the heat of the moment, you aren’t able to take a critical overview of your performance – you are too focused on each trade. Your brokerage statements are quite useless and if they are like mine – appear to have been created on a 1980s dot matrix printer.

There’s no magic in journaling. It’s not specifically a trading tool, either. It’s a tool used for many endeavors. People on diets do it – after all, it’s one thing eating a sneaky Snickers bar and pretending you didn’t. But eating one, then having to write that down in your diet journal and add another 450 calories to your day – that’s a different thing entirely. It’s a form of self-policing, mindfulness. Diets, saving money, competitive sports, golfers, free divers – lots of people are using journals and the common thread seems to be self-improvement and mindfulness.

And of course – looking at things with the sort of unbiased eye you don’t have in the heat of the moment. 

Of course – initially, trade journaling will be a little painful. The more you need it, the more painful it will be. Few people start journaling when they are already profitable. For most – the review of your journal at the end of the day/week will be like somebody on a diet seeing 14 Snickers eaten for the week.

The question the would-be trade journaler needs to ask themselves is this:

“Will I improve as a trader by shielding myself from my dumb trades or by facing them head-on?”

And of course – you do need to face your errant behavior in order to defeat it. Resetting your SIM account won’t do that. In fact, with our Journaling tools – we often get emails saying “can you delete my history for January please?” and we don’t like to do it – because if January looks good and we delete it for you, then February will probably look just as bad.

Any downsides to journaling?

There is one downside to journaling that is pretty common. That’s people that end up with a green day every day for a month and then need to finish the month with a green day because a red day would spoilt it. Of course – the moment you NEED to win on a day – that’s when you dig yourself a nice hole to bury the month’s profits in. Getting close to goals or setting goals like this is dangerous. You become overly invested in the outcome of a particular day or reaching a particular number. And this is when they blow it big time. 

Another downside is doing too much. Yes – make notes but don’t write a book for each trade. You need to do the minimum work to get the maximum output. Start small – a few trade types, a few tags. When you do your end-of-day/week review – you’ll know if you are missing info and you can add a little more detail on the next trades you take. 

Is this used in the professional world?

Yes – Journaling is mandatory in most proprietary trading firms for their interns. It’s expected that the traders use it as the basis for improvement. In the following video, we can see a trader at Axia Futures going over his performance with the Journalytix journaling tool. The tool is just there to facilitate his analysis. It’s 40 minutes long but it gives you an amazing look into the world of trader improvement for a fairly new professional trader. 

Journaling is not anybody’s favorite activity. Until that is – it starts paying off by giving you the feedback loop you needed to improve your trading. 

Jigsaw’s “Journalytix” automates much of the Journaling process for traders and so far, traders have pushed through over 12 million trades through the system. You can give it a free test drive if you click here. Just remember though – the magic is in you reviewing the trades at the end of each day and week, then taking action where necessary. 

FREE BONUS: Take a look into the decision-making process of professional traders with this video training series that helps you make smarter trading decisions. (Article continues below)

Order Flow itself is simply information. Just like charts, it can be used in a number of ways, some good and some bad. But let's first break down order flow into it's components so we all agree what we are talking about:

Order Executions/Tape Reading - This aspect is the real flow of orders. It's the information we see in Time & Sales, Footprint Charts, Cumulative Delta. It is looking at market orders, either as they execute or historically. I guess this is the "true order flow". Every trade is a buy and a sell. We look at market orders because we consider them to be more aggressive. When someone trades with a market orders, they are giving up a price to get an instant fill. Limit orders on the other hand just lazily sit there waiting for a market order to hit them. Often these are market makers with no directional conviction. So we see market orders as being more significant.

But we don't use these in isolation.

Volume Profile/Positions - The tape reading part helps us assess various things like momentum, traders getting stuck, balance of trade BUT the volume profile helps us understand where people are positioned and likely to get stopped out. I sometimes call this "Order Flew". It's important to know when trades will be "washed out" - for example - if we have a volume cluster on the S&P500 Futures and the market moves up 100 points and back down to it, it's unlikely short term traders on either side that were positioned there will still be there. But recent, nearby volume helps us assess areas of positions.

Market Depth - The bids and offers, the lazy passive orders waiting to be hit. This is part of the story but in terms of overall importance, I'd put it at around 20% at most. For example - if you return to the high of the day on any market, the offers will be quite large directly above the high. It means nothing at all. It's just a quirk of the market. It does not help you tell if a price will hold. On the other hand, if you see large depth and as we approach it, we see more added to the depth in front of that price, it means others are front running that depth and that is a useful bit of information.

This is the key - it is all just information. Just like price charts are information. When people look at Order Flow, they consider it to be a technique more than a set of information. They look for things like iceberg orders and decide to make a one rule trading system to fade every iceberg, For these people - yes, order flow trading is overrated because they are trying to ignore everything else going on in the markets and construct a trading system a chimp could execute.

For those looking to improve a decent trading approach, the best thing to focus on in Order Flow is momentum. Once you can read momentum you can:

• Avoid getting into positions when momentum is against you.
• Confirm trades are working after entry when momentum goes your way.
• Exit trades in profit when momentum fades.

That's perhaps the easiest way to use order flow because momentum is easier to read. It's about the market continuing to do what it's already doing. On the other hand, reading a turn in the market with order flow takes a higher level of skill and a little longer to learn.

Order flow can't put lipstick on a pig. It won't help you 'improve' something that doesn't work anyway, which is why whenever someone calls me, the first thing I ask is what they are currently doing and we discuss whether they need a reset or whether it will actually help.

When Jigsaw started back in 2011 - we were one of the first in the space and certainly had the best education. It was always going to attract the underbelly of the trading education/tools world and now we see stuff out there that is so complex but so impressive and futuristic that new traders are drawn to it like moths to a flame.

So here's my advice when looking at Order Flow

• Order Flow can't improve something that doesn't work.
• Order Flow can be used on it's own, without charts to enter and exit the market but you also have to be able to recognize different market states that need different/altered setups. There is nothing magical about this.
• Don't start jumping at shadows and take 50 trades an hour in your first week looking at Order Flow, be selective. It can be exciting to see cause and effect play out in front of you for the first time but don't overtrade.
• Do drills to learn how to read it before you trade it.
• Markets can only go up and down. Don't overcomplicate it. If you have too many Order Flow tools on your screen - you will not be able to make consistent decisions. Less is more.
• Take time to choose a market with a pace you like. Interest rates might send you to sleep, the DAX might give you a heart attack.

It is hard to see how a set of information could be overrated. It is true that some methods of presenting this information are better than others. It is also true that some people simply get on better with different tools (e.g. Footprint vs DOM).

There's a middle ground between complexity and simplicity that will leave you making consistent decisions where you improve over time. For those people, Order Flow will be way underrated because they will be the one's getting the most out of it.

Those that jump in with both feet on day one and those that have 100 different tools up, for those, it's a painful experience.

Keep it simple and manageable. Start with momentum reading and build from there. You will never look back.