Trading journals

In short

A friend of mine kept every trade he ever made in a spiral notebook, and he swore it saved him more money than any stock tip ever did. If you trade at all, you have probably wondered whether writing things down is worth the trouble. It is, and here is a plain way to start. Open a simple file or notebook and record each trade the day you make it. Write down what you bought or sold, the price, the size, the fees, and the reason you gave yourself. Come back when the trade is closed and note what happened. Set aside one hour every week to read the whole thing over. Look for habits you did not know you had. That is all a journal is, and you can begin today.

The whole of it

What it is

I once watched a neighbor of mine, a good and careful man, tell three different stories about the same bad trade over the course of a year. Each time the story got a little kinder to him. That is not dishonesty. That is just how memory treats us, gently and in our own favor.

A trading journal is a written record of your trades and your thinking around them. It holds the facts, such as the date, the price, and the number of shares or contracts. It also holds the why, meaning what you expected and how you felt when you clicked the button. You are the only reader it needs to please. A journal is not a tax form and it is not a broker statement, though it can help you check both. Think of it as a friend who never forgets and never flatters.

How it works

You have probably noticed that a trade feels very different in the moment than it does a month later. The journal closes that gap. Each entry has two parts. The first part is written before or right when you enter the trade. Note the reason, the price you plan to leave at if you are wrong, and the price you hope to reach if you are right. The second part is written after you exit. Note what you got, what it cost you in fees, and whether you followed your own plan.

The second part matters most. It lets you compare what you meant to do with what you did. Maybe you planned to exit at a set loss but held on, hoping. Maybe you jumped into a trade because you were bored. Those patterns are hard to see from the inside. On paper they show up plain as day.

Once a week, read your recent entries in one sitting. Once a month, add up the results. You are not hunting for blame. You are hunting for the small repeated habits that quietly cost you money. Most of them are fixable, and you are more capable of fixing them than you may think.

The numbers, and where to find yours

A journal runs on a few figures, and you already have them. Your broker sends a trade confirmation for every order and a monthly or quarterly statement. Those show the price, the quantity, the date, and the commissions. Copy the numbers from there rather than from memory. It keeps you honest.

The figures you will track are simple. Entry price is what you paid. Exit price is what you got. Fees are every commission and charge. Profit or loss is exit minus entry, times the size, minus fees. Some traders also track how much money they risked on each trade, measured against their whole account.

Taxes deserve a mention, because a good journal helps at tax time. The IRS explains how gains and losses from selling investments are reported in Publication 550, Investment Income and Expenses, and it explains the forms in the instructions for Form 8949 and Schedule D. Whether a gain is short term or long term depends on how long you held the asset, and the IRS pages spell out the dividing line. The rules about losing a deduction when you buy back the same security too soon are called the wash sale rules, and Publication 550 covers them too. Traders who qualify for special status should read the IRS material on trader tax status. Your broker also sends Form 1099 B, so compare your journal against it. The yearly limit on how much net capital loss you can deduct against other income is set by law and changes only when Congress acts, so check the current figure at the current figure, which the official source publishes each year before you count on it.

A worked example

Let me tell you about Maria Alvarez, a nurse who trades a small account on the side. She keeps a plain spreadsheet. On a Monday she buys 100 shares of a company at 40 dollars a share. She writes down her reason, which is that the company just reported better sales than she expected. She also writes that she will sell if the price falls to 38 dollars.

Her buy costs 100 shares times 40 dollars, which is 4,000 dollars. Her broker charges 1 dollar in fees on the purchase.

The price slips to 38 dollars on Wednesday. Her plan says sell. But she hopes it will bounce, so she waits. On Friday she sells at 36 dollars. Her sale brings in 100 shares times 36 dollars, which is 3,600 dollars. Fees on the sale are 1 dollar.

Now she does the math and shows every step. Sale proceeds are 3,600 dollars. Cost is 4,000 dollars. The difference is a loss of 400 dollars. Add the two fees of 1 dollar each, and the total loss is 402 dollars.

Here is where the journal earns its keep. Had Maria followed her plan and sold at 38 dollars, she would have received 3,800 dollars. Her loss would have been 4,000 minus 3,800, which is 200 dollars, plus 2 dollars in fees, for 202 dollars. Ignoring her own plan cost her an extra 200 dollars. She wrote that number in her weekly review. After she saw it three times in one month, she began setting her exit order the moment she entered a trade. Nobody scolded her. The page just told her the truth.

Where it goes wrong

You have probably started a project with great energy and dropped it by the second week. Journals go that way too. The biggest failure is simply stopping. Make the entry so short and easy that skipping it feels sillier than doing it.

The second trouble is writing only after a win. That gives you a scrapbook, not a journal. Record the losers with the same care, because they teach more. The third trouble is rewriting the reason after the fact. Write your reason before the outcome is known, and never edit it later. If you change it, you lose the very thing the journal was built to show.

Another slip is tracking price and forgetting fees. Small charges add up, and a trade that looks like a tiny win can be a tiny loss once costs are counted. Then there is the habit of hunting for patterns in too few trades. Ten trades will not tell you much. Give it time.

Last, keep your records safe. Back them up, and keep the broker statements and confirmations that back them. The IRS explains in its recordkeeping guidance how long to hold on to records, so check that page rather than guessing. And be gentle with yourself. A journal that makes you feel foolish will get abandoned. A journal that helps you learn will get used.

Questions to answer before you leave this page

What will I write down for every trade, and where will I keep it so I can find it again? When will I set aside my weekly hour, and what will I do to protect that hour from getting crowded out? Am I recording my reason before the outcome, so I cannot fool myself later? Have I matched my entries to my broker confirmations so the numbers are true? Do I know where to find the current IRS rules on gains, losses, and wash sales, and have I noted the deduction limit at the current figure, which the official source publishes each year? What is one habit I already suspect is costing me money, and how will the journal show me whether I am right?