One of the most overlooked opportunities in the speculative world of trading is the valuable information hidden within trading losses. Less experienced traders usually have a hate/hate relationship with losing trades and don’t want to spend much time thinking about them. We are conditioned to be winners! Losing trades are part of doing business, a necessary expense or as many like to call it “tuition”. No matter how experienced you are, you should value losing trades as much as winning trades if not more. Why? They can help you focus on the subtle information available at the time they may have helped you to avoid the loss. This is the recipe for trader development and growth.
Now before you go out and wipe out your account and claim your MBA in trading losses, it is important to define how you are going to extract value and grow from the experience. As a less experienced trader, I’m sure you can pull up a trading history littered with losing trades. Are you able to go back to each losing trade and explain your rationale, execution procedure and the context of the trading environment at the time? If you can’t, then most likely you are lacking what most new traders lack: structure.
Enter the world of the trading plan. New traders get very frustrated with this subject and the reason is they don’t want limitations or guidelines, they just want to press buttons and make money. The new trader, still conditioned to seek entertainment from everything, including trading, enjoys the excitement that comes with the thrills of gambling. Excitement comes from watching news, watching prices jump around and clicking buy or sell to make instant money, no boundaries or rules. Rules mean discipline and that is something most people don’t find entertaining. Discipline is for the armed forces, professional athletes and burlap sack wearing monks. More Vegas and less discipline please!
The trading plan is a well defined set of rules. It accounts for every detail of your trading operations. Things like what time of day you will trade, what type of trading style and methodology you will employ, etc. In order to extract value and gain experience from trading losses, you must first have a well defined plan to measure against. When you have losing trades, the part of your trading plan that you will be using to learn from is the execution part. When you exit a trade, especially as you start out, you need to have a record of your trading signal and all the elements of your setup that was met at the time of entry. You also need to note environment factors like any particular news that may have been driving the market at the time, or important technical levels or conditions from larger time frames. It may sound like a lot of information to record but it’s actually not. Without a methodology or criteria to filter trading opportunities, you will not be able to uncover the subtle details that were present at the time you made your decision.
The subtle information that you gather from your losing trades is what helps make the methodology that you are working with your own. Granted, you will not be able to avoid every loss in the future, but you will have gained enough experience to recognize factors that the uninformed traders don’t see. The next time the market is showing you a potential setup, you will be much better prepared to decide if it is one worth taking.
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Marc Principato, CMT,