If you look at your trading results, and they aren’t meeting your expectations there are two options you have available:
- Lower your expectations; or
- Learn from your mistakes.
In today’s post I’d like to explain a little more about how you can learn from your mistakes to better improve your forex trading.
I convinced a dear trading friend of mine to conduct a self-audit on his trading activity throughout the year. After much discussion about the benefits such an activity has had on my own trading results he was still a little hesitant to do it.
I knew why he didn’t want to do it. It’s the same for everybody else. We don’t want to look back and see all the silly errors. It was painful enough taking the loss, having to revisit it again would just be opening up old wounds.
After leaving him with a challenge to complete I didn’t hear back from him until a week or so later.
As expected he was depressed.
“Ryan I feel so depressed,” he sobbed.
“Why?” I probed, “did you end up doing the self-audit on last year’s trades?”
He heaved a sigh and said that he did.
“Well how did it go?” I asked eager to see a friend had taken me up on such valuable advice.
“I’m crap,” he responded.
“What?”initially I was bewildered by his response, and equally more so by the long pause after my reaction.
“What do you mean?”
“When I took you up on doing the self-audit thing I found out just how BAD I am as a trader!” he then timidly laughed.
No one likes to admit they’re crap, or that they’re incompetent, my friend was obviously telling me this with great internal pain.
“Well that’s good!” I said elated that he had now made the discovery I did when I first started on this process many years ago.
“What do you mean it’s good? I don’t even want to trade anymore!”
I could definitely empathise with my dear friend. He had done an analysis on himself and found himself lacking. I continued on:
“It’s good because now you know why you were crap. What were your underlying factors with your losses, or winners that were cut short?”
He sighed again, obviously I was opening a recently dressed deep cut.
“I guess to put it simply: I didn’t follow any system at all!”
He had just made a VERY important discovery: a big reason for why traders lose money is that they don’t follow a system – even if their system is staring at them in the face on the wall mounted above their computer!
They just don’t have the disciplinary fortitude to stick to a system ESPECIALLY when it’s in a drawdown.
I know when I started trading using a strict method whenever it started losing money I would throw the baby out with the bath water so to speak. I’d toss out the system or method and then trade a completely different way. I missed the opportunity to learn and perform minor tweaks to the methodology I was using.
Refinement is what makes you and your method better.
Losses are just a part of trading life.
It’s demanding perfection that will wipe you out if you leap frog from one method to another, or trade without any method whatsoever!
“So what did you learn from this?” I asked, knowing too well that I had been there and done that and knew the answer.
Immediately his demeanour changed.
“I suppose I’ve got to learn to stick to my system.”
“EXACTLY,” I emphasised. If my friend had been standing near me I would have slapped him – just to make sure he remembered his epiphany.
I brought the issue home, “There’s no use creating the best system in the world if you aren’t going to follow its signals, right?”
“Yeah,” he sheepishly responded.
“So what are you going to do now?” I asked again knowing the best course of action for him to take.
“I don’t know. I’m thinking of giving up trading now.”
It was the best rational response to give. When something doesn’t work it’s best to just give it up and walk away. It’s a defeated response and one most people take, but was there another option?
“Have you considered creating a trading system suitable to your own risk profile and taste? Do you think you could create something that you can stick to and refine?” I asked.
“No,” he said being brutally honest with himself.
“Well what common element did you see amongst those trades that made money?”
It’s important when we do go back through our historical trades that we also focus on what made money. This helps us to refine the system or method we used to enter trades in the first place.
Unfortunately though my friend hadn’t considered this!?
The losses were too painful and debilitating enough he glossed over the wins thinking them more of a fluke.
“What? You traded that bad?”
I decided to call out his exaggeration.
“Well I think I’ve found your perfect forex trading system – do the exact opposite of whatever it is you’re doing!”
We both laughed and yet there was some truth behind it.
We can be our worst enemies when we trade, and if we can just learn to control ourselves we’d be better off, but this is also the hardest thing to do – maintain self-control.
We can also get so caught up in the negative things that we fail to see the silver lining and even if we do trade a method, and it loses big – guess what? You’ve just found a GREAT system: simply reverse the signals of your current system.
Our conversation was nearing an end, so I quickly set up an action plan for him to do by the next time we talked.
“Why don’t you go back over the winning trades and formulate a trading plan? You’ve spent hundreds of dollars on a trading education through books and seminars and you’ve now spent thousands in the school of hard knocks, now it’s time to put that hard knock education to good use.”
I hope this account will help to show you the importance of self-auditing. Please make sure you do it AT LEAST once a year – in fact, do it more often by performing an audit ONCE A MONTH!
It is medicine for your trading process and forex trading career.