When Bad Forex Trades Are Good
02/16/2012 7:00 am EST
Provided they adhere closely to their trade plan and minimize losses, traders in the forex market and elsewhere should view even losing trades as good ones; losing small is simply part of the business.
In a recent Online Trading Academy class I was teaching, a new student/novice trader was silently staring at his screen with a perplexed look on his face. "Jim" has been aware of the markets for a long time and had made only a couple stock trades in his entire investing career; mainly he was a mutual fund holder.
During that day’s class trading session, I asking individual students why they placed their supply/demand zones in those particular places, why they were in a trade, etc.. When I got to Jim, he had no trades on, but did have some supply and demand zones on his chart. Noting his confusion, I asked what was wrong.
Pointing at the screen, Jim asked me, "What did I miss? Did I do something wrong?" The chart showed that he had placed a long trade at a clean demand zone, yet the trade went against him and he took a small loss.
The easy smart-aleck response would have been to laugh and say, "Welcome to trading!" and move on to the next student. The proper response (and the one I gave) was, "You followed your plan and placed a long trade in a quality demand zone in a bigger-picture uptrend. The plan was to take a small loss if it didn’t work out, and to let your winner run. This trade went against you and you took the small loss according to the plan. You didn’t do anything wrong!"
I even mentioned his trade to the entire class, emphasizing that following your plan is how we stay in this trading business for a long time. (By the way, in my classes, I frequently mention student trades—both good and bad—but especially the bad trades!
The way I see it, if you make a trading "error"—buying into a supply zone in a downtrend, for example—I want everyone in class to learn from everyone’s mistakes. There are so many trading mistakes that beginning traders make, I want everyone to see them in class instead of learning them on their own. Learning what a trading mistake is on your own can cost you money, so it’s far better to learn in class!
See related: Traders, Avoid These “Rookie” Mistakes
So, what to do when price does go against you? There are a couple of options, and your choices come down to your own psychology.
First, you could analyze several different time frames, throw different moving averages or Fibonacci retracements on your charts, trying to figure exactly why the trade went against you. If your psychological makeup says you absolutely, positively need to know why, then this is your option.
The second option is to just move on to the next trade, trusting that you will continue to follow your trading plan. I would bet most experienced traders choose option number two.
In the beginning of your trading career, it is a very good idea to figure out some of the “whys,” as this will lead you to focus on the time frames/set-ups, etc., that you are good at, and avoid the ones that you are bad at.
Some of the whys that can cause a trade to against you are: A bigger picture trend was starting to re-establish itself; a moving average may have been there; you were near a weekly high or low; or perhaps even a news event caused the move. The list is seemingly endless!
After you have a track record of trading and you know what you are looking for on the chart, I imagine the whys of losing trades will become unimportant to youâ€¦as long as you take your small losses and let your winners run!
Here is a short checklist to keep you on the right track of winning trades:
- What is your bigger-picture trend: up, down, or sideways?
- If in an uptrend, qualify clean demand zones for entries and supply zones for exits. Switch those for downtrends. To qualify these zones, read any number of articles, or better yet, get into one of our Online Trading Academy classes to see it work live!
- Do you have a clear 3:1 reward-to-risk ratio?
Take those trades and manage your winners accordingly!
The bottom line is this: The best of the best traders take small losses. It is part of the business, and it should be part of your overall trading plan.
Don’t fall into the trap of beating yourself up over these small losses. Eventually, you will get to the level of not being bothered by them. Would we rather have every trade be a winner? Of course, but this is unrealistic.
By understanding that you didn’t do something wrong as long as you take the small loss, you are still doing it right!
By Rick Wright, instructor, Online Trading Academy