After a terrible losing trade, perhaps the last thing you’d want to do is to revisit and scrutinize that loss. Here’s why looking at your worst trades can be good for you.
In life we usually develop repetitive behavior: we wash our faces when we wake up (at least I hope you do!), we eat lunch around noon, we wash our hands after meals, and go to sleep at a specific time. You see, we develop daily routines that help us get through the day. And as creatures of habit, we also go through patterns in trading.
Over time, we form a routine in the way we process and react to information thrown at us. For example, some people lie to their partners on impulse even if they did nothing wrong just to avoid a lengthy conversation. Heck, even a kid would fib a little just to avoid a scolding. They aren’t really liars by nature, but they have already conditioned themselves to respond a certain way given a specific situation.
How does this apply to trading?
I know this might make you cringe but try looking at the worst trade you’ve ever had in your trade journal. Review the trade setup that you saw, think about what went wrong, and ask yourself, “Why the heck did I ever take that trade in the first place? What was I thinking?!?”
More importantly, “Was I even thinking?!?”
You probably just took that trade automatically based on a familiar setup. In this case, your decision was a result of your own way of thinking rather than what the market was telling you.
Your worst trade isn’t necessarily the one where you’ve incurred your largest loss. It can be in the form of a missed opportunity, when you hesitated to take what could’ve been your trade of the year, or when you locked in profits too early instead of letting it ride. You might’ve wimped out because of your fear of losing, even when the markets gave every indication that this next trade would be a winner.
Another negative thought pattern is when you become absolutely indifferent to losing that you end up blindly taking one trade after another just to make up for your losses. In this case, you keep insisting that you’re right and you believe that you will eventually beat the market. Revenge trading turns into a nasty habit and could result in large drawdowns if not corrected.
The usual response to bad trades is just shrugging them off. Much like the memory of getting rejected by crushes in high school (not that it happened a lot to me), it’s easier to simply push the memory of a bad trade at the back of our heads, and falsely reassure yourself that you’ll prepare better next time, and then move on to the next trade.
But that’s not enough!
You have to REALLY dig in into the problem and review the nitty-gritty of your bad trades. Otherwise, you run the risk of repeating your mistakes.
No matter how painful or discouraging the task is, you must force yourself to open your trade journal and ask yourself questions like:
• “Why did I take the trade?”
• “Did I follow valid signals when I closed my position?”
• “Is ‘How you doin?’ really such a bad pick-up line?”
Okay, maybe the last question is more apt for your Saturday night problems, but you know what I mean!
In forcing yourself to identify the emotions you felt when you made bad trading decisions, you might be able to see a negative pattern in your behavior and take actions to correct it. Unlearning bad habits and trading practices can be difficult, but they will certainly bring you one step closer to controlling your emotions and becoming a better trader.