Trading Psychology 101

09 - How to Learn from Your Losses


As discussed in the previous section, it is very important to have a thorough review of your trade in order to determine what you did wrong or what you did right. In case the trade turns out to be a losing one, you can still benefit from it by figuring out what you could've done better and applying these lessons to your future trades.

While it's true that it can be painful to review a losing trade, remember that experience is the best teacher and that your losses can be a good reminder of what you should avoid later on. Did you fail to watch an important economic release that wound up in a price reversal? Were you unable to adjust your stop loss in time? Were you too greedy with your profit targets? By remembering these mistakes, you can remind yourself not to repeat them in your next setups.

Most losing trades stem from either a completely wrong price bias or improper trade execution. The former one may be easier to correct as it could simply demand better analysis or a more precise outlook for future economic releases. On the other hand, the latter could take time to develop as it requires the formation of better trading habits.

Quite too often, human emotion interferes with proper trade execution, as the fear of losing can lead you to set stop losses that are too tight or to lock in profits too early and miss out on larger moves. Meanwhile, greed or overconfidence can tempt you to set profit targets that are too ambitious or to overtrade. What's important in your learning process and trade journaling is that you note down your motivations for setting your stops or targets or for making trade adjustments midway so that you are able to identify behavioral patterns that you might need to correct.

Another factor that can interfere with trade execution is indifference, particularly when you are in a long losing streak and you feel numb to consecutive losses. This can be damaging to your trading psychology and may be a sign that you need to take some time off instead of forcing your trades. When you spot this kind of thought pattern in your losing trades, you should remind yourself to take it easy or take a step back from trading for a while.

Some say that the worst can bring out the best when it comes to the learning process. While a terrible trade can have some sort of trauma on a trader, it can also be an excellent reminder of how a trading mistake can impact profitability and one's mindset.