To become a successful trader, one needs to do a number of things. The trader needs to be fully committed to trading and understanding the stress involved in it. Without this interest, chances are high that the trader will give up when he loses his funds. Secondly, the trader needs to identify his best strategy to enter, hold, and exit trades. Third, a good risk management strategy is important because it will facilitate asset allocation in the portfolio. Finally, the trader needs to understand the need for learning from his mistakes. This is achieved through journaling which many of the best traders have confessed to practice.
A trade journal
A trade journal is a sheet of paper or excel document that highlights the trades entered, the reason for entering, holding, and exiting them. By developing a journal, one is at a good position to understand his trading style in a better manner. Whenever he buys or sells a stock, Warren Buffet has developed a routine of writing down the reasons for doing this down. The same practice is practiced by super star traders such as Ray Dalio, Bill Ackman, and George Soros.
For currency traders, having a good journal will help you understand the best currencies to trade, when to trade, how to trade the release of economic data, and how to allocate resources in your portfolio.
The journal I will recommend in this article will include 3 key parts: a currency pair checklist, trades that you are waiting for, and existing or completed trades.
Checklist on the currencies
This is a very important part of your trading journal because it will give you an in-depth feel of the market before you start trading. Before you start trading, I recommend that you fill this part with the aim of identifying a ranging or trending market. In your checklist, you should have a number of spreadsheet columns which have the following sections: currency pairs, current prices, high prices, low prices, and the triggers for the events. After the column on the daily highs and lows, the next column should have the 10, 20, and 30 day highs and lows. This will give you a clear picture of the market and how it is performing.
The triggers you should have in the checklist include the key technical indicators that you use. One, the Average Directional Index (ADI) is the most commonly used indicator to determine the strength of a trend. An ADI reading of 25 indicates that a trend has developed and the higher the number, the stronger the trend. After the ADI, the Bollinger bands indicator shows a trend has developed when the pair crosses either the upper or lower Bollinger band. The Bollinger and the ADI are the best indicators for identifying the trend. The next column should have the Simple Moving Averages (SMAs) which are essential for identifying a longer term trend.
The final part of the journal indicates the range group. Here, the ADX below 25 should be looked at which indicates that the trend is weak. Then, the oscillators, Relative Strength Index (RSI), and stochastic should be indicated. A weak ADX with important technical resistance above the Moving Averages, RSI, Stochastic, and the Fibonacci retracement indicates a range.
Trades you are waiting for
After doing the market analysis, you should be at a good place to understand where the market is going to. In this journal entry, you should now indicate what you are waiting for in a systematic and scientific manner. A good example of this is:
21st August 2015
Buy EURUSD on a break of 1.1234 (previous day high)
Stop at 1.1200 (30-day SMA)
Target 1 1.1280 (38% Fibonacci retracement of June – July bull wave)
Target 2 – 1. 1292 (upper Bollinger)
Target 3 – 12 day trailing low
By having such a journal, you will know what to do when the level is reached. For instance, you will be at a good position to place a buy order at 1.1234 and a take profit and a stop loss.
Existing or completed trades
At the end of every trading day, you should have a quick look at the journal with the aim of establishing a pattern. You should look at the trades you won and those which went against your analysis. You will also look at instances where you took profits prematurely, extended losses, and when you got emotional and made a mistake. By looking at this scheme, you will have a good understanding of what has worked for you in the past and what has worked for you. In fact, you are able to input this data to a computer and analyse it to improve your trading.
Entry: Bought 4 lots of EUR/USD @ 1.1243
Stop loss. 1.1200 (a strong technical support)
Target. 1.1300 (upper Bollinger), 1.1310 (former head and shoulders support turned resistance, 100-day SMA)
Result. Trade closed at -85 pips
EURUSD failed to continue the estimated uptrend. It was also becoming overbought because the ADX was weakening, falling from higher levels, and there was no divergence in stochastics.
Note. Watch out for divergences next time.