Posted on Thursday, 10th February 2011 by admin
The Incredible Power Of A Losing Trade
How do you deal with a losing trade? The answer to this question reveals an incredible amount about a trader. We all know the industry statistic that 90% of traders fail, lose money, and give up trading. Only 5% of traders make consistent gains in the market. That is quite a staggering figure. That means that if you pack 20 aspiring traders into a room, only 1 is going to make it. Although there are several leading reasons why most traders will fail, one of the least discussed reasons is an inability to properly handle losing trades.
Now, we are not referring to the ability to try to minimize losses by using a stop loss. We are not talking about trade management at all. In this article, we are going to discuss how a trader ought to handle a losing trade after the losing trade is closed out.
Unfortunately, many less than stellar educational resources and e-books on the web encourage new traders to simply forget about a losing trade and move on as quickly as possible. This is not the best and highest use of your losing trades. The best forex brokers will offer transaction history reports, so you can print out your losing trades and analyze them.
There is Gold In Those Losing Trades
The truth is that there is gold in your losing trades; however, you cannot see it at first glance. You will have to dig a bit to find it. When you take a trade and it ends up being a winner, what do you learn from that? Most likely, not much. When you conduct your analysis and find a trade setup that matches your criteria and take the trade, if the trade works out, you simply learned once again that you have a good strategy. The trade did just what you thought it would—that’s why it’s a winner!
However, when you conduct your analysis and find a trade setup that matches your criteria, but the trade doesn’t work out, something has happened that you were not expecting. But if you simply forget about your losing trades and try to move on immediately, you will never find the possible deeper reason for why your trade was a loser. By examining your losing trades, you will most likely begin to identify all sorts of causes, and by repeatedly conducting this exercise, you may begin to notice patterns. Let’s use an example to illustrate this point.
Bob The Counter-Trend Trader
Bob trades a simple range-expansion reversal strategy. That means that when a currency pair reaches its average daily range, then Bob looks to fade the intraday momentum and trade price back into its daily range. In other words, let’s assume EUR/USD has been moving up all day, and let’s also assume that EUR/USD is generally moving about 130 pips per day in current market conditions. As EUR/USD comes close to moving 130 pips on the day, Bob is going to be looking for strong areas of overhead resistance where EUR/USD may turn and reverse back down for a small scalp trade.
This strategy works great, and Bob is making consistent gains in the market. However, during times of increased volatility, when a currency pair moves beyond its ADR before 9:00 am est, Bob has noticed that his strategy does not perform well because when a pair gets overly volatile, it can move well beyond the ADR. Thus, after suffering losing trades consistently when trying to fade a currency pair when it moves its ADR before 9:00 am, Bob has realized that he can only execute this specific strategy after 9:00 am each day. This keeps Bob out of potential losing trades before he takes them, and it is because he analyzed his losing trades.
There is gold in your losing trades. Do not let them go to waste.
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