🎯 In 30 seconds: A trading journal is a record of every trade: the plan before, the result after, and what you were thinking. Without one, you remember your wins and forget your mistakes. With one, you can compute the numbers that tell you whether your trading works: win rate, average win, average loss, expectancy and maximum drawdown. Review it every week and every month, look for patterns by setup, and change one thing at a time. Ten trades prove nothing. A few dozen per setup start to tell you something.
Why keep a journal at all
Memory is a bad record keeper. People tend to remember their wins as skill and their losses as bad luck. Overconfidence like this is one explanation researchers have given for why individual investors trade too much and earn less.
A journal replaces impressions with numbers. It answers questions you cannot answer otherwise. Which setups make money? Do you follow your own rules? Do you lose more on Mondays, after a losing streak, or when you trade in the first 15 minutes?
It also gives you the data that Risk/reward and expectancy and Position sizing depend on.
What to record on every trade
Before you enter (this is the plan):
- Date and time, stock, long or short.
- Setup: the name of the pattern or reason, from a short fixed list, such as "pullback", "breakout" or "range".
- Planned entry, stop (the price where you are proven wrong) and target.
- Position size and risk in dollars: shares x (entry − stop).
- Why this trade, in one or two sentences.
After you exit (this is the result):
- Actual entry and exit prices, and fees.
- Profit or loss in dollars.
- R-multiple: profit or loss divided by the planned risk. A trade that risked $100 and made $210 is +2.1R. One that lost $110 is −1.1R.
- Did you follow the plan? Yes or no, and if no, what you did instead.
- How you felt: calm, rushed, bored, angry after a loss. Keep it to one word.
- A chart screenshot with entry and exit marked, if you can.
R-multiples matter because they let you compare trades of different sizes. A $50 loss on a small position and a $500 loss on a big one can both be −1R: the same plan, working the same way.
A sample journal: ten trades
All trades are hypothetical, with made-up companies. Each trade risks $100 (1R = $100). Fees are ignored to keep the arithmetic clear; in a real journal, include them.
| # | Stock | Setup | Entry | Stop | Shares | Exit | P&L | R |
|---|---|---|---|---|---|---|---|---|
| 1 | Co. A | Pullback | $50.00 | $48.00 | 50 | $54.20 | +$210 | +2.1 |
| 2 | Co. B | Breakout | $20.00 | $19.00 | 100 | $19.00 | −$100 | −1.0 |
| 3 | Co. C | Pullback | $80.00 | $76.00 | 25 | $76.00 | −$100 | −1.0 |
| 4 | Co. D | Breakout | $30.00 | $29.00 | 100 | $31.50 | +$150 | +1.5 |
| 5 | Co. E | Range | $12.00 | $11.50 | 200 | $11.70 | −$60 | −0.6 |
| 6 | Co. A | Pullback | $52.00 | $50.00 | 50 | $58.00 | +$300 | +3.0 |
| 7 | Co. F | Breakout | $40.00 | $38.00 | 50 | $38.00 | −$100 | −1.0 |
| 8 | Co. G | Pullback | $25.00 | $24.00 | 100 | $25.40 | +$40 | +0.4 |
| 9 | Co. H | Breakout | $60.00 | $58.00 | 50 | $57.80 | −$110 | −1.1 |
| 10 | Co. B | Pullback | $22.00 | $21.00 | 100 | $24.20 | +$220 | +2.2 |
Notes from the same journal: trade 5 was exited early "because I was bored", before the stop or target. Trade 8 was closed early after a small dip, against the plan. Trade 9 gapped below its stop at the open, so the loss was 1.1R, not 1R.
The stats to compute
From the ten trades above: 5 wins totaling $920, and 5 losses totaling $470.
| Win rate = wins / trades = 5 / 10 | 50% |
| Average win = total won / wins = $920 / 5 | $184 (1.84R) |
| Average loss = total lost / losses = $470 / 5 | $94 (0.94R) |
| Payoff ratio = average win / average loss = 184 / 94 | 1.96 |
| Expectancy = (win rate x avg win) − (loss rate x avg loss) = (0.5 x 184) − (0.5 x 94) | +$45 per trade (+0.45R) |
| Profit factor = total won / total lost = 920 / 470 | 1.96 |
| Net result = 10 x $45 | +$450 |
| Breakeven win rate = avg loss / (avg win + avg loss) = 94 / 278 | 33.8% |
Expectancy is the most important number. It is what the average trade makes or loses, including the losers. If it is negative after costs, the system loses money over time no matter how good individual trades feel.
The breakeven win rate tells you how much room you have. With these average win and loss sizes, you would still break even winning only about 34% of the time.
Drawdown: the number that tests you
The maximum drawdown is the largest drop from a peak in your running total to a later low. Plot the running total after each trade to see it.
Here the largest drawdown was $200, from $210 after trade 1 down to $10 after trade 3. A later drop from $400 to $230 was $170. Drawdowns and streaks are normal even for good systems. See Drawdowns and losing streaks.
Break it down by setup
| Setup | Trades | Wins | Net | Per trade |
|---|---|---|---|---|
| Pullback | 5 | 4 | +$670 | +$134 |
| Breakout | 4 | 1 | −$160 | −$40 |
| Range | 1 | 0 | −$60 | −$60 |
It is tempting to conclude "drop breakouts". But four trades is far too few. A fair coin can easily land tails three times out of four. The right response is to keep logging and look again when each setup has dozens of trades, not to rewrite the system after a handful.
Weekly and monthly review
Every week (20 to 30 minutes):
- Make sure every trade is logged, including fees.
- Count rule breaks. In the sample, trades 5 and 8 broke the plan. Write what triggered each one.
- Look at the best and worst trade. What made each one?
- Write one thing to do differently next week. Only one.
Every month (about an hour):
- Update the stats: win rate, average win and loss, expectancy, profit factor, drawdown.
- Split the stats by setup, by time of day, and by whether the plan was followed.
- Compare the trades where you followed the plan with the ones where you did not. Usually this is the most useful table you will make.
- Check that costs are included. See What trading really costs.
- Decide whether to keep, adjust or stop. If expectancy after costs has been negative over a meaningful number of trades, reduce size or go back to paper trading.
A spreadsheet is enough. If profit and loss is in column H, win rate is =COUNTIF(H:H,">0")/COUNT(H:H) and average win is =AVERAGEIF(H:H,">0"). Your journal also helps at tax time: you can check your own records against the cost basis your broker reports, since short-term gains are taxed as ordinary income.
Try it
Make a spreadsheet with the columns from the sample table, plus Plan followed (yes/no), Feeling and Notes. Place ten trades in the paper portfolio using one setup, log each before entering, and then compute every stat in the table above. Plot your running total and find your maximum drawdown. Then read Writing a trading plan and turn what you learned into written rules.
- A trade risked $100 and made $210. What is its R-multiple? Answer: +2.1R (profit divided by the planned risk).
- Which journal number does the chapter call the most important? Answer: Expectancy: what the average trade makes or loses, including the losers.
- Your win rate is 50%, your average win $184 and your average loss $94. What is your expectancy per trade? Answer: +$45 per trade ((0.5 x $184) - (0.5 x $94)).
- After 4 breakout trades with only 1 win, should you drop breakouts from your system? Answer: No. Four trades is far too few. Keep logging and look again when each setup has dozens of trades.