Friday, 17 October 2014

Bad Trades are Good

Another week of trading is coming to an end. Here in Thailand I'm already relaxing at +35C.  If you're in Europe the trading day just started while in the US it's middle of the night.   I typically stick to the saying Don't Trade on Monday's or Friday's and today it sure looks like it's time to call it a day.  I've made my pips this week already.  I hope you have too!
I hope you've had a good week.  And if you've had a bad trade then this article is for you!  You see Bad Trades are Good!  Bad trades are a learning experience. 
The worst thing that can happen to you is making too many positive trades when you start trading.  It gives you false confidence. I know because it happened to me.  When I first started trading I made nothing but positive trades.  I think 79 in a row was my record.  It gave me a false confidence.  I made some bad trades here and there but by far I felt unstoppable and on top of the world.  Positive time and time again.  Until one day I had back to back losses.
I couldn't believe it.  Back to back losses.  Big losses.  What was wrong?  I had been a rising star and now I'm in the minus for the day. The week. For the month!   What the hell?
Well it was the best thing that happened to me and I wish it would have happened sooner because you learn the most from your mistakes.
So if you've had a bad trade.  Shake it off.  Go on with life.  Stop trading for the day.  Then when you have a clear mindset, maybe after you slept on it, then go back and retrace your reasons for going into the trade. Then determine what went wrong and what you can do in the future to not make the same mistake again.
The most common mistakes are:
  • Trading shortly before, during, or shortly after news.  The market is too volatile.  Like that high wind crashing wave after wave into the ocean shore.  Wait to ride a good wave when things settle down.
  • Trading before Market Open times.   Make a note when the Europe, US, and Asian Markets open.  Try not to trade shortly before that time.
  • You feel the market is turning.   Unless you are a seasoned trainer or can predict the future, don't get caught up in trading potential reversals.   Trust me, you'll know when a currency has reversed direction.
  • Your analysis wasn't thorough.  Always get a feel of trend and market conditions on ALL timeframes.  Monthly, Weekly, Daily.   Technical analysis on the bigger time frames is key to taking calculated risks.   If all the major timeframes say down and you are going long based on a signal on a 5m chart you are asking for trouble. 
  • Your lots size was too big.   Bigger isn't always better.  If you are sweating just a little bit when the market isn't moving the way you thought it would, well then you are using a lot size that's too big for your comfort level.   You can minimize your risk and maximize your reward by using a lot size that's proportional to the "strength" of the signal and your analysis.   The more certainty the bigger the lot size.  For example,  I will trade a full lot if several indicators confirm my signal.   If the confirmation isn't strong then I'll half the lot size. 
  • You can't stay out.   Many people will be somewhat addicted to trading and want to place a trade every day either because they want to prove to themselves they can do it or because they feel this need to trade all the time.  It's like overeating.   You get thirsty and instead of drinking water you opt for a Big Mac.   And after you're done with the meal you didn't really need you hit up a coffee shop and suck back an iced latte and a couple donuts.   Self control is a must in trading.  All those calories add up.  All those trades out of boredom or lack of discipline will add up too.
  • No confirmation.  Some people see an entry but jump the gun too quick and place their trade before waiting for the confirmation..  For example CCI or RSI are great indicators for confirmations.  Candle closes and opens are too. another great oscillator for confirmation.    You need to wait for a candle close before your signal is valid.
Whatever the reason for your bad trade.  Study it and find out what you're doing wrong. 

One of my students has a big problem with this and hence she is struggling.  She just wants to place a trade and make money.  When she makes a bad trade she throws her hands in the air and complains, instead of analyzing her mistake.   And when she does analysis it's only for the signal and not for the confirmation or "red flags" like a major trend line or upcoming ECB or FOMC News Event.

You will learn more from your bad trades than your good trades.  So don't be afraid to make mistakes, just be committed to analyzing your bad trades.