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How to benefit from failed trades, this is a learning!

Published: Jun 16, 2024
Updated: Jun 16, 2024

No one likes failure! However, traders on their trading journey are inevitably going to experience countless failures. In fact, failure itself is not terrible; the key is whether you can benefit from it.

Every trader is bound to suffer losses due to failure. The real difference between winners and losers lies in their attitude towards handling failure. Only by learning from failure, drawing experience and lessons from failed trades, and gaining something, can our trading skills continue to improve. So, since it is a failed trade, what can we learn from it? What should we do specifically? This is actually a science in itself.

Phase division of failed trades

Firstly, traders are divided into the following two phases:

1. Before creating a trading system

For beginners, before having a stable trading system, failure is the best teacher. By learning from failed trades, through observation, summarization, and induction, one can slowly explore methods and then gradually improve other aspects of the system, creating their own trading system.

2. After creating a trading system

After several years of continuous exploration, summarization, and induction, beginners gradually transform into experienced traders and have also created their own trading system. Subsequently, we can further divide the failures encountered in trading into two types: correct failures and incorrect failures.What is the correct kind of failure? It means that the trading system has its relatively stable win rate and loss rate, and the system will also generate some trading rules. As long as the trades that comply with the rules fail within a reasonable margin of error, they can be called the correct kind of failure.

What is the wrong kind of failure? It refers to the trades that result in losses due to violating the trading rules, which are called the wrong kind of failure.

Each trading system has its own strengths and weaknesses. When you have your own trading system, learning from failed trades can help you optimize the system's weaknesses, leverage strengths and avoid weaknesses, making the system more and more efficient.

How should we learn from failed trades specifically?

Learn from failed trades in a targeted way according to different problems encountered in different trading stages.

1. Before creating a trading system

First, keep trading records so that you can better review the trades later. Then, when reviewing, carefully compare failed trades with successful trades to see what the differences are. Observe and think carefully about why successful trades succeed and why failed trades fail. By continuously summarizing and generalizing, abstract a trading model and create your own trading system.

2. After creating a trading system

First, categorize the failed trades to see if they belong to the correct kind of failure or the wrong kind of failure. Then, for the correct kind of failure, try to think about whether it can be further optimized and how to do better; or, if it is determined that it cannot be further optimized, it can be temporarily ignored and regarded as the cost of the trading system. For the wrong kind of failure, you should strive to improve your execution. You can set up a reward and punishment mechanism, reward for adhering to the trading rules for several times in a row, and punish for violating the trading rules.By continuously learning from failed trades, one can refine their trading system into a system with a positive expected value, and constantly strive to maximize this expected value. No successful trader has a smooth sail. To become a successful trader, you need to accept that you are human and that everyone makes mistakes. Even the most successful investors occasionally make significant errors, and accepting failure is an important path to success. Remember: every trading day is different, and you have both profits and losses every day, so it is important to take some time to reflect.

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