Being Wrong

We start with this important topic because once we understand the nature of real mistakes in the trading environment; we will find trading much easier. Most people do not like the thought of being wrong so refuse to dwell on it, blame someone else or do not admit the error. This is a shame as we at StraightForex teach all our students that mistakes are inevitable and we should look to learn from them as opposed to any recriminations.

When this happens they become a positive learning experience

Dealing with mistakes

This is one of those subjects that is totally neglected.

When trying to “fix” something we tend to focus on those things that are closely related, or more properly said, those that you can see more readily. Like in the trading environment, when you lose a trade, what is the first idea that pops up in your mind? It would probably be, “There must be something wrong with my system, or I knew it, I shouldn’t have taken this trade (even when your system signaled it). However, sometimes we need to dig a little deeper in order to see the nature of our mistake, and then work on it accordingly.

In the trading business, as you may already know, only 5% of traders achieve the ultimate goal: to be consistent in making profits. What is interesting though is that there is just a tiny difference between this 5% of traders and the rest of them: successful traders grow from their mistakes. They take mistakes as a learning experience, mistakes no longer obstruct but instruct. They learn an invaluable lesson on every mistake made. And at the end, this tiny difference becomes THE big difference. In their minds, a mistake is nothing more than a chance to try it harder and do it better the next time, because they know they might not get another chance.

Mistakes in the trading environment

Most of us relate a trading mistake to the outcome (in terms of money) of any given trade. The truth is a mistake has nothing to do with it; a mistake is made when certain guidelines are not followed. When the rules you trade by are violated. Take for instance the following scenarios:

First scenario: The system signals a trade.

1. Signal taken and trade turned out to be a profitable trade.
Outcome of the trade: Positive, made money.
Experience gained: It’s good to follow the system, if I do this consistently the odds will turn in my favor. Confidence is gained in both the trader and the system.
Mistake made: None

2. Signal taken and trade turned out to be a losing trade.
Outcome of the trade: Negative, lost money.
Experience gained: A losing trade is part of the business; we know we can’t get them all right. Even with this loss, the trader is proud of himself for following the system. Confidence in the trader gained.
Mistake made: None

3. Signal not taken and trade turned out to be a profitable trade.
Outcome of the trade: Neutral
Experience gained: Frustration, The trader always seem to get in trades that turned out to be losing trades and let the profitable ones go away. Confidence in the trader lost.
Mistake made: Not taking a trade on a system signal.

4. Signal not taken and trade turned out to be a losing trade.
Outcome of the trade: Neutral.
Experience gained: The trader will start to think that she or he is better than her system. From this point on, the trader will try to outguess his or her system. This mistake has catastrophic effects on our confidence to the system.
Mistake made: Not taking a trade on a system signal.

Second Scenario: System does not signal a trade.

1. No trade is taken
Outcome of the trade: Neutral
Experience gained: Good discipline, we only need to take trades when the odds are in our favor, just when the system signals it. Confidence gained in both the trader and the system.
Mistake made: None

2. A trade is taken, turned out to be a profitable trade.
Outcome of the trade: Positive, made money.
Experience gained: This mistake has the most catastrophic effects in the trader’s confidence, the system and most importantly in the traders trading career. You will start to think you need no system, you know better from them all. From this point on, you will start to trade based on what you think. Confidence is the system is totally lost. Confidence in the trader turned into overconfidence.
Mistake made: Take a trade when there was no signal from the system.

3. A trade is taken, turned out to be a losing trade.
Outcome of the trade: negative, lost money.
Experience gained: The trader will rethink his strategy. The next time, the trader will think it twice before getting in a trade when the system does not signal it. The trader will go “Ok, it is better to get in the market when my system signals it; only those trades have a higher probability of success”. Confidence is gained in the system.
Mistake made: Take a trade when there was no signal.

As you can see, there is absolutely no correlation between the outcome of the trade and the mistake made. The most catastrophic mistake even has a positive outcome, made money, but this could be the beginning of the end of the trader’s career. As we have already stated, mistakes must only be related to the violation of the rules a trader trades by.

How to deal with mistakes

There are many ways available to properly manage mistakes. I will suggest the one that works better for us.

Step one: Changing a belief

Every mistake is a learning experience. They all have something valuable to offer. Instead of feeling frustrated (try to counteract this natural tendency) approach mistakes in a positive manner. Instead of yelling to everyone around and feeling disappointed, say to yourself “ok, ok, I did something wrong, what happened? What is it?

Step two: Identify the mistake made

Define the mistake, find out what caused the mistake, and try as hard as you can to effectively see the nature of that mistake. Finding the mistake’s nature will prevent you from making the same mistake again. Sometimes you will find the answer where you least expected it.

Step three: Consequences of the mistake

List the consequences of making that particular mistake, both good and bad. Good consequences are those that make us better after dealing with the mistake positively.

Step four: Meditate on your mistake

Think on all possible reasons that you can learn from what happened and ways to prevent the mistake to happen again.

Step five: Take proper action

Taking action is the last and most important step. In order to learn, a change in behavior is needed. By taking action we turn every mistake into a small part of our success.

Remember, we all make mistakes. The process of success comes from repeated mistakes and the constant struggle to achieve greater results. How we deal with them will shape our future.