The journal is an excellent way to keep track of a person’s thoughts, plans, and desires. While it can be known as a diary to some, it’s real purpose is to preserve past events and associated behaviors so that we may be able to reflect upon where we were and how that influences where we’re going. Because of this, it makes perfect sense that a journal concept can be an effective part of the investment world. These records – explicitly known as trade journals – are essential because they can provide investors with an easy to follow touchstone on what they’ve done, which can come in handy for bookkeeping and develop future strategies.
Why Keep a Trade Journal?
A trade journal is a detailed record of all of an investor’s financial transactions. If you’re a new investor that just hired a brokerage firm, you may look at this basic definition and wonder if there’s a point of keeping one. After all, a broker is paid to keep track of these things as a means to make the wisest investment decision possible, right?
While brokers are indeed charged with helping investors forge a winning investment strategy, keeping a trade journal has immense benefits that just can’t be derived through a brokerage firm. These benefits directly correlate to the ways in which a journal should be kept. On the surface, you’re jotting down notes, but on a deeper level, you’re helping to mold your personal investment strategy that fits who you are as an investor, as opposed to a broker telling you what type of investor you are.
Trade Journal Basics
A successful trade journal will contain detailed entries on every transaction that is performed. This information obviously should include basic raw data, such as purchase/sell price, date of the transaction, and the name of the stock. It’s also wise to circle back and make a note of the stock’s post-transaction performance. However, it also needs to contain other somewhat intangible elements that can be reviewed later on to influence future transaction-based behaviors.
For instance, it’s imperative that you make a note of the reason why you made the transaction in the first place. Your rationale here should be as detailed as possible. Don’t merely settle for a quick blurb. Get into the meat of the decision, detailing your thoughts on the stock movement, the research was done to draw you to the decision, and even how you were feeling at the time you made the decision. Taking note of these things is important because they can help you pinpoint flaws or strengths in your investment strategy. For instance, if your decision to trade stemmed from feeling that things were “good enough” and you noted the post-transaction stock price would have netted you more if you would have held on, a journal entry detailing exactly this may spur you onto to doing better research or keeping you from growing impatient.
Another key component to a trade journal is to keep track of your stop and limit numbers. While you may feel comfortable operating with those numbers floating around in your head, writing them down on paper tends to sharply lower the temptation to adding leeway to these “set” numbers. But it does more than holding you more accountable for staying true to your parameters. It can be a vital tool to help you to plan ahead for various contingencies. In other words, you’ll have a fleshed-out setting that won’t sneak up on you, which in turn can result in a more thorough strategy.
Another important part of keeping a trade journal is to make a note about the trade in its aftermath. Some of this will be taken care of already if you track the stock’s post-transaction performance. However, other elements you can note relating to profit and loss will give you a complete picture of how you handled the transaction as a whole.
How These Elements Work Together
The crux of following these crucial trade journal steps is to make you a smarter, more disciplined investor. The world of investment is one that is fast-paced; an eternally moving entity whose sometimes wild fluctuations may make it difficult to stay focused. Keeping a trade journal will go a long way into keeping you on the straight and narrow and less subject to falling for the whims of the market.
A trade journal provides a handy reminder that maintains a record of all the perils and problems of going off course. It can even help you spot places that are clear deviations from your strategy, even if you didn’t realize they were deviations at the time. Not only that, you don’t have to pull data from a software program or contact a broker to get this information.
What’s more, you shouldn’t think of using a trade journal as being unfaithful or untrusting of your brokerage firm. If anything, they will probably be supportive of you using this tack. After all, if you’re a smarter, more disciplined investor, that means you’re less likely to flame out. This means you’ll have money to keep making transactions, which translates to received commissions on the part of the broker. Considering that brokers tend to make the lion’s share of their profits from fees, why wouldn’t they want you to sharpen your investment skills and transaction acumen?
A Record Gives You Confidence
Fear can be a crippling emotion in the stock market. Keeping a trade journal keeps this emotion to a minimum. Seeing what you did wrong and learning from such mistakes will make you a better investor, as will recognizing what went right and kept to the winning formula behind the successes. This is an effective combination that ultimately breeds confidence; the kind of feeling that leads to pulling the proverbial trigger at the right time.
As with anything relating to the stock market, keeping a trade journal will not guarantee to make extreme profits. There are still risks involved. With that being said, a properly kept trade journal will go a long way into minimizing those risks. In the world of investing, this is always a good goal to focus on.