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Learn From Your Very Worst Trades
08/18/2014 9:00 am EST
In this article, the staff at FXTM explains the importance and necessity of reviewing and learning from every trade, including—even as painful as this may be—the bad ones.
The human mind is interesting. Rather than learning from past mistakes, most people tend to focus on the positive and forget failures. While this may help them to keep a more balanced attitude towards life, it is also a major liability when it comes to forex trading.
Why do we ignore bad trades?
There are many reasons that people don’t look at their bad trades—stopping themselves from rolling up in a ball in the corner is one of them. However, this is not the only reason people don’t pay attention. First of all, humans automatically tend to operate on autopilot—we have a set of learned reactions that we execute without really thinking, freeing up our mind for dealing with novel information and threats. This made perfect sense when we were out on the savanna—it was more important to figure out how to get away from the lion, rather than focusing on the mechanics of running.
Why is this disastrous?
However, with forex trading, this is a recipe for catastrophe. If a trader just responds automatically to a seemingly familiar pattern and trades on it, their natural tendency is to dismiss the trade as bad luck if it goes south. However, if the trader doesn’t look at the details of the trade, they are unlikely to learn from subtle differences that they would have spotted if they had been paying attention. Because of this, they will make the same mistake again and again. In other words, only by looking at bad trades do we become better traders.
Frustration just makes things worse
Even worse, some traders just get plain frustrated when they are on a losing streak. This is natural, but it often means that they throw caution to the wind. They become reckless, trying to recoup their losses either out of anguish or annoyance—in either case, they don’t take the time to reflect on their trades and ask themselves why they went bad. In some cases, it actually may be bad luck—after all, trading is far from an exact science—in which case, determining this can help traders to take a more philosophical attitude. On the other hand, if a trader is actually doing something wrong, then it’s better to find out sooner rather than later and bring the losing streak to a halt.
Look at the details
No matter how painful it is, there is no benefit to be had from just taking a superficial look at your bad trades. You need to really get under the skin of the trade, asking yourself why you decided to take it, whether you read the signals correctly, and whether you had a robust risk management strategy. Also, keep in mind that a bad trade isn’t necessarily one where you lost your shirt, it could be one where you failed to make the profits you should have done, or one you simply walked away from because you were afraid.
By the Staff at FXTM
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