Do you think a winning trade is always good?Think twice...

What is the first idea that pops up in your mind when you lose a trade? “There must be something wrong with my system”, or “I knew it, “I shouldn’t have taken this trade” (even when your system signaled it). But sometimes I think that we need to dig a little deeper in order to see the nature of our mistake, and then work on it accordingly.

What Mistakes really are

Most of us relate a trading mistake to the outcome (in terms of money) of any given trade. The truth is, mistakes have nothing to do with it, we make a mistake when we don’t follow our system, when the rules you trade by are violated. To have a better understanding of this, take in consideration the following two scenarios:
First scenario: The system signals a trade.

Action: Signal taken and trade turns out to be a profitable trade.

Outcome of the trade: Positive, made money.

Experience gained: It’s good to follow the system, if I do this consistently the odds will turn in my favor.

Confidence is gained in both the trader and the system.

Mistake made: None.

Action: Signal taken and trade turns out to be a losing trade.

Outcome of the trade: Negative, lost money.

Experience gained: It is impossible to get them all right, a losing trade is just part of the game; our raw material. Even with this negative trade, the trader is proud about himself for following the system. Confidence in the trader is gained.

Mistake made: None.

Action: Signal not taken and trade turns out to be a profitable trade.

Outcome of the trade: Neutral.

Experience gained: Frustration, the trader always seems to get in trades that turned out to be losing trades and let the profitable ones go away. Confidence is lost in the trader self.

Mistake made: Not taking a trade when the system signaled it.

Action: Signal not taken and trade turns out to be a losing trade.

Outcome of the trade: Neutral.

Experience gained: The trader will start to think “hey, I’m better than my system”. Even if the trader doesn't think on it consciously, the trader will rationalize on every signal given by the system because deep in his or her mind, his or her “feeling” is more important than the system itself. From this point on, the trader will try to outguess the system. This mistake has catastrophic effects on our confidence to the system. The confidence on the trader turns into overconfidence.

Mistake made: Not taking a trade when system signaled it

Second Scenario: System does not signal a trade.

Action: No trade is taken

Outcome of the trade: Neutral

Experience gained: Good discipline, we only need to take trades when the odds are in our favor, just when the system signals it. Confidence gained in both the trader self and the system.

Mistake made: None

Action: A trade is taken, turns out to be a profitable trade.

Outcome of the trade: Positive, made money.

Experience gained: This mistake has the most catastrophic effects in the trader self, the system and most importantly in the trader’s trading career. You will start to think you need no system, you know better from them all. From this point on, you will start to trade based on what you think. Confidence in the system is totally lost. Confidence in the trader self turns into overconfidence.

Mistake made: Take a trade when there was no signal from the system.

Action: A trade is taken, turned out to be a losing trade.

Outcome of the trade: negative, lost money.

Experience gained: Next time, the trader will think it twice before getting in a trade when the system does not signal it. The trader will go “Ok, it is better to get in the market when my system signals it, only those trade have a higher probability of success”. Confidence is gained in the system.

Mistake made: Take a trade when there was no signal from the system

As you can see, there is absolutely no correlation between the outcome of the trade and a mistake. The most catastrophic mistake even has a positive trade outcome, made money, but this could be the beginning of the end your trading career. As I have already stated, mistakes must only be related to the violation of rules a trader trades by.

These mistakes were directly related to the signals given by a system, but the same could be applied when getting out of a trade. There are also mistakes related to following a trading plan. For example, risking more money on a given trade than the amount the trader should have risked and many more.

How to Avoid Trading Mistakes


Most mistakes can be avoided by:

1. Having a trading plan. A trading plan includes the system: the criteria we use to get in and out the market, the money management plan: how much we will risk on any given trade, and many other points.
2. Secondly, and most important, we need to have the discipline to strictly follow our plan.

We created our plan when no trade was placed on (I hope so), therefore no psychological barriers were up front. By following our trading plan, we are making sure that all trading decisions will be taken on our best interests, and in the long run, these decisions will help us have better results. We don’t have to worry about isolated events, or trades that could had give us better results at first (monetary), but then they could have catastrophic results in our trading career.

Understanding the fact that the outcome of any trade has nothing to do with a mistake will open your mind to other possibilities, where you will be able to understand the nature of every mistake made. This at the same time will open the doors for your trading career as you work and take proper action on every mistake made.

Now, we are all human, and human make mistakes, we all do, but we can grow from them, mistakes; mistakes are a learning experience, we can learn invaluable lessons on every single mistake made. Every mistake is just one more chance to try harder and do it better the next time, because we don’t know if we are going to get another chance next time.

What do you think?

Feel free to comment, you don’t have to agree with me in order to leave a comment. And don’t forget to like it if you found this article useful.