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Trading Tips

Being a reflective trader

Examine your trades periodically to learn from the good ones and the bad ones, but don’t equate profitable with good and unprofitable with bad.

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Brett at TraderFeed recently offered up a post titled How to Be Your Own Trading Coach. Seeing as he’s the guy who literally wrote the book on self-coaching as a trader (The Daily Trading Coach), the headline alone got my attention. 🙂

In the post Brett recommends a period exercise in which you pick out your best trade and your worst trade of whatever time period is relevant to your trading (day, week, month, etc.) and analyze them. Basically, what you’re looking to do is to identify what you’ve done well on the good trades so you can repeat that in the future. At the same time, you’re looking to pick out where you failed with the bad trades so as to avoid those same mistakes moving forward.

This, of course, is a very good bit of advice. It is only through reflection and proper self-analysis that we can develop ourselves as traders over time.

I have one thing to add to Brett’s suggestion, however. It has to do with the judgement of good vs. bad trades.

The natural inclination is to think of good trades as winning ones and bad trades as losing ones. This is too narrow a way to look at things, however. In reality there are four trade quality and trade performance combinations (excluding break-even trades).

Good trade / good performance
Good trade / bad performance
Bad trade / bad performance
Bad trade / good performance

In other words, you can do everything right and still have the markets go against you – bad luck. Similarly, you can do everything wrong with your trade and still end up making money – good luck.

When you examine your trades, be honest with yourself. Did you actually make a good trade or not, regardless of whether you made money?

Of course all this requires an understanding of what makes for a good trade. That’s a conversation for another post, though.

By John

Author of The Essentials of Trading

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