In one of my earlier posts, we talked about how important it is to look over your worst forex trades. But how can you tell the difference between a good and a bad trade?
I thought it was important to talk about this because many people think that all winning trades are good and all losing trades are bad.
As you may have guessed, it’s not just about making money.
It doesn’t matter if the trade made money or not to decide if it was a good or bad forex trade. In fact, you can have both good trades that lose and bad trades that win.
Still not getting it? Here’s a good guideline:
A good trade is one that you made and managed according to your trading plan.
Good trade to lose
- Let’s say that your system calls for a long position when the 100 and 200 SMAs cross over and the Stochastic hits “oversold” territory. You see the market moving and want to get in, but you wait until all the signals from your system line up before you do.
- Finally, your system tells you it’s okay to go long, so you do. For a while, the trade works in your favor, but then it goes the other way and you get stopped out.
- Don’t be afraid, friend. You just made a good trade that went wrong. Even though it didn’t make you any money (and might have even cost you some), you can be proud of yourself because you were disciplined and stuck to your forex trading rules.
Bad trade that won
- Now, let’s say that your trading rules say you can’t risk more than 5% on a single trade. But then you see a good setup on USD/JPY that you think is a trade with a high chance of success. You just can’t help yourself, so you make the trade and risk 20% of your account.
- When everything is said and done, the trade works out well and you end up with a lot of money.
- There’s no reason to party, man. You just made a bad trade that won. Even though you made a lot of money, you broke one of your forex rules. You were lucky that the trade went your way, but keep in mind that in the world of forex, luck can run out very quickly.
What should you do with trades that are good?
- Give yourself a pat on the back if you were disciplined and stuck to your trading rules.
- Remember that, at the end of the day, traders try to be consistent in their trade processes, and your decision to stick to your rules is definitely a step in the right direction.
- As I said before, even if you didn’t make a lot of money with your trade, you can just think of it as a learning experience and move on.
- Find out what went wrong and decide if there are any changes you need to make for the next time. This learning can even help you become a better trader in the future!
What do you do when you make a bad trade?
- If you broke one of your trade entry rules and you can still get out of your position, do so. After all, you shouldn’t be in that trade to begin with!
- Don’t give up right away if you’re in the middle of a bad trade. Don’t forget that you can still make things better by turning a bad trade into a good one.
- For example, if you broke your risk management rule that says you should always trail your stop, you can still fix your trade by adding a trailing stop that follows your rules.
- If, on the other hand, you’ve already closed a bad trade, don’t feel bad yet. We’re people, and people make mistakes, unless you’re a robot.
- Just tell yourself that you won’t make the same bad trading choices again. Write it down in your trading journal or write it down a hundred times if you need to in order to remember it.
In the end, as traders, we should care more about the process than the money we make. It’s easy to think that winning trades are always good and losing trades are always bad, but that’s not always the case.
Don’t forget to look at the bigger picture and remind yourself that every trading decision you make should help you become more consistent and a better trader overall.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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