Keeping Forex Trading Journal
At this point, it is important to mention that any decent trading journal should have some necessary pieces of information, such as:
- The date and the time of opening the position
- The currency pair or commodity, where the trader opens the position
- The amount of money invested and the overall size of the position
- Buy or Sell, whether a trader took a short or long position
- The actual exchange rate or commodity price where the trader opened the position
- The closing price of a given security
- The amount of gains or losses in pips
- The size of gains or losses in the currency of the trading account
- Additional notes: such things as which techniques and indicators were used by the trader
This is essentially the list of standard items on the typical trading journal Forex traders use on a daily basis. Obviously, depending on one’s preferences, market participants can add additional columns in their trading journals in order to keep track of those items, which they feel to be necessary.
Here it is also important to note that for those traders who are using carry trade strategies, it is recommended to add these additional sections:
- Central bank interest rates for two currencies involved in a carry trade
- The nominal interest rate differential between those two currencies
- Effective broker commission
- The daily amount of swap, paid by the broker to the trader
- The estimated total annual amount of interest earnings
With all these pieces of information, traders can keep track of their trading performance and possibly in the long term even increase the size of their payouts.
How Can Traders Create Trading Journal Spreadsheet?
At this point, many people might ask a very logical question: If somebody decides to start their first trading journal, how can one go about it? Well, here it is worth noting that there are at least 3 options available.
Firstly, the oldest and for some people the old-fashioned method of doing this is to just take a notebook and pen. Traders can use a ruler and draw some vertical lines in order to separate different sections.
Now, this method might work quite well for a significant number of traders. However, for some market participants, it might be inconvenient for a number of reasons. For example, the notebook might be too small for the trader to be able to fit in all of the sections we discussed above. At the same time, once the lines are drawn, the market participant can not modify them to better fit those items.
Consequently, the majority of traders do prefer to use more modern alternatives, when deciding on how to create a trading journal. So the most obvious way to achieve this is the use of Excel spreadsheets. So how to make a trading journal in Excel?
Well, actually the process is actually quite straightforward. Traders need to create a new Excel file and open it. Then market participants should adjust the size of rows and columns in a way to make enough space for all of the items necessary for creating a proper trading journal.
After completing this step, the traders should write the headings for each column, such as data, currency pair, exchange rate, and other items. This is meant to make it easier to recognize the meanings of journal entries. Once traders start opening and closing positions, they need to make the necessary journal entries in order to keep track of their trading activities. Traders should also choose the style and size of the font they will use to fill the rows.
Finally, traders can create a new list for each passing month. This makes it much easier to analyze and compare the trading results between the different months. Here market participants do not need to go through all of the steps of this process all over again. Instead, they can copy the headings of columns from the original list and paste them in other lists. Here traders would just need to adjust the size of the rows and columns, while also setting the style and size of the font as in other lists.
So as we can see here, creating a proper trading journal is quite simple and does not require advanced IT knowledge.
Advantages of Using Trade Journal
Despite the relative simplicity of creating the trading journal, there is no doubt that this sort of record-keeping does require some extra work and discipline. Therefore, for many traders, this creates a very natural question: Is organizing the trading journal worth it?
Well, it goes without saying that analyzing several Forex charts, keeping an eye for economic announcements, and opening and closing positions on a daily basis can be an already very tiring task. Therefore, adding some additional burden to this routine can be quite uncomfortable for some traders.
In fact, there are some successful traders who are not using a trading journal but do still earn some decent payouts on a regular basis. So having a trading journal is not an essential prerequisite for successful trading.
However, here it is also important to mention that by keeping a trading journal, Forex traders can certainly get some important benefits. The first obvious advantage here is that it allows market participants to easily keep track of their trading performance on a regular basis. This means that with this tool, traders can know the exact amount of their monthly gains or losses. Then they can analyze whether their overall results are improving or worsening over the months.
Therefore keeping the trade journal is also very important for beginners who are still testing their trading skills on demo accounts. By having records of all of their trades at hand, traders can calculate their
average monthly returns and decide whether they are ready to move on to real trading accounts.
By regularly updating their trading journals, traders can also analyze with which currency pairs or commodities they had the best results, by having the high ratio of winning trades and earning considerable payouts. Consequently, the market participants can then focus on these securities in their future trades in order to improve their overall performance.
At the same time, the trading journal allows traders to analyze how different strategies have performed in the past and which Forex indicators were most reliable. Here the market participants can also isolate these techniques and indicators, which were proven to be unreliable and avoid using them in their future trading decisions.
Examples of Practical Applications of Trading Journal
At this stage, some people might be interested to see practical examples, how one can record his or her trades in the trading journal. In order to do this, let us take a look at this 1-hour GBP/USD chart:
Two arrows in this diagram show the opening and closing points. So if a trader opened the long GBP/USD position with 1 lot and 1:10 leverage, how would one record this in the trading journal?
Well, an individual should make the following entries in the spreadsheet or notebook:
- Date of opening position: 23/06/2020
- Currency pair: GBP/USD
- Position: Buy
- Amount Invested: $10,000
- Size of Position: $100,000
- Opening exchange rate: 1.2515
- Date of closing position: 21/07/2020
- Closing exchange rate: 1.2757
- Gains/losses in pips: + 242
- Gains/losses in USD: + $1,933.68
Traders can also specify which indicator or Forex strategy they have used in this trade. This can be very useful for future analysis.
It goes without saying that from time to time even some of the most experienced professional traders do have losing trades. So let us take such example, from this 1-hour EUR/JPY chart:
Here let us suppose that the market participant decides to open the long EUR/JPY position with 1 lot and 1:10 leverage just like in the previous example. So in this case, the journal entries will look like this:
- Date of opening position: 23/06/2020
- Currency pair: EUR/JPY
- Position: Buy
- Amount Invested: $10,000
- Size of Position: $100,000
- Opening exchange rate: 121.03
- Date of closing position: 10/07/2020
- Closing exchange rate: 120.35
- Gains/losses in pips: - 68
- Gains/losses in USD: - $561.84
So as we can see here, it does not take much time to learn how to make a trading journal. In fact, one can simply make a Forex trading journal template, as described above, and then just make necessary entries, just like in this example.
How to Use Trading Journal with Carry Trades?
Recording of regular trades seems quite simple, but how about the carry trades? Should not traders record them somewhat differently? Well, in order to answer these questions with more clarity, let us take an example, from this daily USD/JPY chart:
Firstly, it is important to mention that carry trade entries in the journal should include all of the items, just like with regular trades:
- Date of opening position: 16/08/2017
- Currency pair: USD/JPY
- Position: Buy
- Amount Invested: $10,000
- Size of Position: $100,000
- Opening exchange rate: 109.56
- Date of closing position: 20/03/2020
- Closing exchange rate: 111.22
- Gains/losses in pips: + 166
- Gains/losses in USD: + $1,515.15
Now, because this is a carry trade, the market participants should consider adding the following entries to their trading journal:
- The interest rate of carry trade currency: 1.25%
- The interest rate of funding currency: -0.10%
- Nominal interest rate differential: 1.35%
- Effective broker commission: 0.10%
- Daily swap, paid by the broker: $3.42
- The estimated total annual amount of interest earnings: $1,248.30
Here it is worth noting that traders would make these entries at the time of opening of the trade. However, the fact of the matter is that the central bank interest rates and consequently the broker
swap rates are constantly changing. Therefore, traders should keep these entries updated in accordance with those changes. For example, as the US Federal Reserve raised rates up to 2.50% by the end of December 2018, the journal entries will look like this:
- The interest rate of carry trade currency: 2.50%
- The interest rate of funding currency: -0.10%
- Nominal interest rate differential: 2.60%
- Effective broker commission: 0.10%
- Daily swap, paid by the broker: $6.85
- The estimated total annual amount of interest earnings: $2,500.25
So as we can see here the journal entries with carry trades should be constantly updated in order to account for the latest interest rate changes. This is because even a relatively small drop or increase in rates can significantly affect traders' swap earnings.
Finally, it is important to note here that brokers usually do not pass on the full interest rate differential to their clients. Instead, they do retain some portion of it as a commission. Therefore, it is also important to mention the estimated effective percentage in those journal entries.
This might sound as rather a complicated task, however, it involves a few simple steps. Traders can use a swap calculator at the brokerage website to calculate the daily interest earnings with one particular position. Traders then can multiply it to 365 and divide it by the position size. Finally, the percentage difference between the central bank interest rate differential and the effective rate of return will be the broker's commission.
Returning to our example above, if the daily swap, paid by the broker is $6.85, then the total annual return will be $6.85 x 365, which is $2,500.25. The next step is to divide this number by position size, $2,500.25 / $100,000, which equals 2.50%. Since the interest rate differential between those two central banks is 2.60%, then this means that the effective broker commission is 0.1%.
Imperfections of Forex Trading Journal
Despite all of its benefits, it is worth noting that trading journals do have their own imperfections as well. Obviously, the same goes for any other Forex tools, since there is no such tool to guarantee a 100% success rate.
The first major disadvantage of using trading journals is the fact that it is very difficult to utilize them in scalping trades. This style of trading involves opening and closing positions from 1 to 15 minutes timeframes. Consequently, these types of traders can execute up to 50 or even 60 trades per day. Theoretically, traders can still record all of these in their trading journal; however, it seems rather obvious that for the majority of the market participants, it can be a very tedious task.
Another style of trading that might be incompatible with trading journals is the use of Forex arbitration strategies, especially when it comes to so-called ‘triangular arbitrage’. Here it is important to note that this type of trading involves the opening of positions with 3 currency pairs, composed of 3 same currencies.
For example, opening a long EUR/USD and short EUR/GBP and GBP/USD positions would be an obvious example of that. The main aim of this trade is to take advantage of market pricing inefficiencies and earn some returns in the process.
Now, the degree of success with this style of trading greatly depends on the speed of the execution of trades. The reason behind this is that there is a relatively small window of opportunity with arbitrage trades before the markets discover and eliminate them. Therefore it goes without saying that with this style of trading, even having an ability to execute trades a couple of seconds faster can give one a competitive edge. Therefore, many traders might not have the luxury of spending some time on filling out trade journals.
Here it is worth noting that the arbitrage opportunities usually offer some small amount of pips to traders. It is not realistic to expect to make massive gains from a single arbitrage trade. Therefore, in order for traders to earn some decent payouts from this strategy, they need to execute several trades per day. Even if a trader uses 20 arbitrage trades per day, that's 60 separate entries in the trading journal. Here again, theoretically it is possible, but realistically speaking, for many traders this might be an exhausting task.