A trade journal is a written record of your trading decisions: what you planned, what you actually did, and what you learned. Its value comes from writing the plan down before the result is known. Once a trade is over, memory quietly rewrites it; a note written beforehand can't be rewritten.
This article covers what to record, how to measure results so very different trades can be compared, and which thinking errors a journal can expose. It is general information about record keeping, not a suggestion to trade or a view on any security.
Before the trade: the plan
The plan is the part most often skipped, and the one that matters most. Write down:
- The thesis. Why you expect the trade to work, in a sentence or two. "Broke out of a three-month range on twice the usual volume" is a thesis; "looks strong" is not.
- What would prove it wrong. The event or price that would show the idea has failed. This is not always the same as the stop, but it should be specific.
- Entry, stop and targets. Where you plan to get in, where you will get out if you are wrong, and where you plan to take profits, including how much of the position you would exit at each target.
- Size. How many shares or units, and therefore how much money is at risk between the entry and the stop.
- A setup tag. A short label such as "breakout" or "earnings" so you can later compare results by type of trade.
The distance from entry to stop, multiplied by the size, is the amount you plan to risk. That amount is called 1R, and it is the unit everything else is measured in.
During the trade: the fills
Record each fill as it happens: the date, price, quantity and fees for every entry and exit, including partial exits. Fees matter more than they seem; on small positions they can turn a modest win into a loss.
If you change the plan once you are in the trade, for example by moving the stop, note it as a change rather than editing the original. The gap between what you planned and what you did is one of the most useful things a journal shows.
After the trade: the review
When the trade is closed, answer a few questions honestly:
- What went to plan?
- What mistakes did you make, if any?
- What would you do the same or differently next time?
- Did you follow the plan: yes, partly or no?
A rating of how well you handled the trade, separate from whether it made money, is worth adding: a sound plan can still lose, and a careless trade can win by luck.
A worked example in R
Suppose the plan is to buy 200 shares at $25.00 with a stop at $24.00. The risk is $1.00 a share, so 1R is $200. The targets are $27.00 for half the position, which is 2R, and $28.00 for the other half, which is 3R. If both targets were reached, the plan would make 2.5R before fees (half the position at 2R plus half at 3R).
Here is what actually happened, with a $10 fee on each fill:
- Bought 200 shares at $25.00.
- Sold 100 at $27.00. The gain is $2.00 x 100 = $200, less its own $10 fee and half the $10 entry fee: $185.
- Sold the other 100 at $25.50 after the price stalled. The gain is $0.50 x 100 = $50, less $10 and the other $5 of the entry fee: $35.
The realised result is $220, which is 220 / 200 = 1.1R. The first exit reached its target; the second was before the target and before the stop, so it was an early exit. The review can then ask a precise question: was there a reason in the plan to sell early, or was it nerves?
Measuring in R lets you compare a $200-risk trade in US dollars with a $2,000-risk trade in Australian dollars. Money totals should still be kept separately for each currency, because adding US and Australian dollars together without converting them gives a meaningless number.
Expectancy: what the R-multiples add up to
Expectancy is the average R per trade: what a typical trade returned for each unit of risk.
Take ten closed trades: four winners averaging +2R and six losers averaging -1R. The total is (4 x 2) - (6 x 1) = +2R, so the expectancy is +2R / 10 = +0.2R per trade. The same figure comes from the win rate times the average win, less the loss rate times the average loss: 0.4 x 2 - 0.6 x 1 = 0.2. The profit factor, total R won divided by total R lost, is 8 / 6, about 1.33.
Now take ten different trades: seven winners averaging +0.5R and three losers averaging -1.5R. The win rate is 70%, which sounds good, but the total is 3.5 - 4.5 = -1R and the expectancy is -0.1R per trade. The profit factor is 3.5 / 4.5, about 0.78. A high win rate on its own says little; it has to be read with the size of the wins and losses.
Be careful with small samples. Ten or twenty trades are mostly noise, and a few results can swing every figure. Past results, even a long record of them, don't guarantee anything about future trades.
Biases a journal helps you catch
- Hindsight bias. After the result is known, it feels as if you knew all along. A thesis written beforehand shows what you actually expected.
- Outcome bias. Judging a decision by its result rather than its reasoning. Recording whether you followed the plan, separately from profit and loss, keeps the two apart.
- The disposition effect. The tendency to sell winning positions too soon and hold losing ones too long. Exits marked "early" on winners and "past the stop" on losers show it plainly.
- Moving the stop. Loss aversion makes it tempting to give a losing trade "more room". A plan that records the original stop, and flags changes, makes the habit visible.
- Confirmation bias. Looking only for evidence that supports the idea. Writing down what would prove you wrong forces the other side of the argument.
- Recency bias. Letting the last few trades dominate your view. Results by month and by setup put a bad or good week in proportion.
Keeping it going
A journal only helps if it includes the trades you would rather forget. Short entries written every time beat long ones written occasionally. Review the record regularly, look for patterns by setup and by whether you followed the plan, and change one thing at a time.
The Take Profits trade journal records plans, fills and reviews in this way and works out the R-multiples and review figures for you. This article is general information only and does not take into account your objectives, financial situation or needs.