What Makes a Trade Good or Bad?

Updated from its original posting on 2012-10-26

What constitutes a good trade? Simply put, a good trade is one that has been taken and managed in accordance with your trading rules.

I felt the need to discuss this because there seems to be a common misconception that all winning trades are good and that all losing trades are bad. But there’s more to it than that.

Whether or not the trade was profitable doesn’t determine if it was a good or bad trade. It’s possible to have good LOSING trades as well as bad WINNING trades.

Good losing trade

Let’s say that your system calls for a long position when the 100 and 200 SMAs cross over and Stochastic hits oversold territory. You see the market moving and feel eager to jump in, but you wait until your system’s signals line up before entering your trade.

Finally, your system gives you the green light and you go long. The trade works for you for a while, but it eventually turns around and you end up getting stopped out.

Don’t worry, my friend. You just had a good losing trade! It may not have earned you any profits (heck, it even cost you a few bucks), but you have something to be proud of because you showed discipline and stuck to your trading rules.

Bad winning trade

Now, let’s assume your trading rules state that you can’t risk more that 5% on a single trade. But then you spot a sweet setup on USD/JPY that you think is a high probability trade. You just can’t resist, so you end up taking the trade and putting 20% of your account on the line.

When all is said and done, the trade turns out a winner and you find yourself sitting on a big wad of dough.

There’s no need to celebrate, mate. You just had a bad winning trade. It may have led to huge profits, but you broke your rules in the process. You were lucky that the trade worked out in your favor, but keep in mind that in the world of forex, luck can dry out really quickly.

What should you do with good trades?

If you exercised discipline and followed your trading rules, give yourself a pat on the back! Remember that, at the end of the day, traders strive to achieve consistency in executing solid trade processes and your decision to abide by your rules is certainly a step in the right direction.

As I mentioned earlier, even if you weren’t able to rake in the profits with your trade, you can just chalk it up to experience and learn from what happened. Figure out what went wrong and decide if you need to make any adjustments next time. This learning experience can even help you improve your trading performance later on!

What should you do with bad trades?

If you broke one of your trade entry rules and your position is still open, get out while you still can. After all, you’re not supposed to be in that trade in the first place!

When you’re in the middle of a bad trade, don’t lose hope right away. Remember that it’s still possible to remedy the situation by turning a bad trade into a good one. For instance, if you broke your risk management rule which states that you should always trail your stop, you can still fix your trade by adding a trailing stop based on your rules.

If, however, you’ve already closed a bad trade for whatever reason, don’t feel bad just yet. We’re humans and we make mistakes, unless of course you’re a robot like Robopip. Just remind yourself not to make the same bad trading decisions in the future. Make a note in your trading journal or write it down a hundred times if that’s what it takes to sear it into your memory.

The bottom line is that, as traders, we should focus on the process and not the profits. It’s often tempting to automatically consider winning trades as good ones and losing trades as bad ones, but that isn’t always the case. Don’t forget to look at the bigger picture and remind yourself that each trading decision you make should be on track to achieving consistency and becoming a better trader as a whole.

How do you determine if a trade is good or bad?

2 comments

  1. madjr

    This is good advise and not just in trading but in many other areas and aspects of life.

    Is like a General allocating his resources and troops. If you don’t follow the plan you may win some battles but end up losing the war.

    Reply

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