NOBODY likes making mistakes, especially when you lose money doing so. This is a feeling that contracts for difference (CFD) traders will be all too familiar with. But take heart, much as Winston Churchill once said: “All men make mistakes, but only wise men learn from their mistakes”. Traders can do just this by keeping a trading diary.
It might seem like a painful way of re-living your mistakes, but it can really help. Michael Hewson of CMC Markets explains: “The most common mistakes traders make are tied up in emotion. Keeping a diary can help you stop doing that.”
Indeed, most of us can empathise with the desire to stick with a losing trade in the hope it will bounce back – and know how annoying it is to have jumped out of a good trade too soon. Keeping a diary allows you to check whether or not you are falling into this trap.
David Jones of IG Index sees this all the time: “A really common mistake my clients make is trading against the trend. Human nature is to see a market going up and look to sell it – and buy one that is falling like a stone. This tendency is very easy to pick up if you keep a diary with charts in.”
WHAT TO JOT
But what exactly should you be jotting down? We asked the experts and here’s their take on what you should do.
Get a folder – it doesn’t need to be anything glitzy or electronic, paper will do. Reserve three pages for each trade. Note down all the useful information you can think of on the first page: moving averages, support or resistance levels, but crucially how you were feeling at the time, what time and why you entered the trade.
The less thorough might find that printing off the chart and scrawling notes across it is a quicker method.
Page two should be the same process, but for the time you sell. It’s really important to note anything that might have affected your mood. Were you rushing into the trade because you thought the prices were about to change? Did you give enough thought to your risk-reward ratio and stop loss?
Finally, the third page is for reflection. This is the most important part of the process. It allows you to leave the trade alone and return to it at a later date with fresh eyes. It is a lot harder to ignore your bad habits if they are staring at you in black and white.