Traders frequently have such a strong focus on their profitable transactions that they completely disregard their loss trades.
You stand to gain the greatest knowledge from your unsuccessful trades, though.
Here are three strategies for taking lessons from failed trades.
1. Calculate Your Performance
Look up the trades you’ve made in the past. Ask your broker for assistance if you are unable to locate them.
Collect your profit and loss information so you can start examining the variables influencing your overall success.
Find your average gain now.
Average Gain = Total Gain / # of Profitable trades
Next, find your Total Loss:
Average Loss = Total Loss / # of Unprofitable trades
Once you have both numbers, let’s display it as a ratio so you can dig deeper into where your profits and losses are coming from:
Profit/Loss Ratio = Average Gain / Average Loss
For example, let’s say you had 10 profitable trades with an average $200 gain per trade and 5 unprofitable trades with an average $300 loss per trade:
Profit/Loss Ratio = $200 / $300 Profit/Loss Ratio = 0.67
The difference between the average profit and average loss per trade is known as the profit/loss ratio.
Your profit/loss ratio is 0.67 in the example above because your average gain is $200 and your average loss is $300.
The average profit you make is just 67% of the typical loss, according to this.
Or, to put it another way, you lost 1.5 times as much as you won ($300 on average loss vs. $200 on average gain).
Fortunately, out of 15 deals, you prevailed in 10.
67% of the time you won.
Win % = # of Profitable trades / Total trades Win % = 10 / 15 Win % = 0.67 or 67%
You can also gauge how effectively you’re managing and closing out your holdings by comparing the average gain to the average loss each transaction.
If your average loss exceeds your average gain, consider the following:
Do I typically follow through with my initial trade ideas or do I veer off course?
What factors affect how I decide whether to exit a deal when it is profitable?
Do I follow my predetermined risk management rules when my trades are not profitable or do I hang on to losing transactions for too long?
You can find your flaws and gradually develop better trading habits by responding to these questions.
2. Drill Down on Your Losses
Because you have the most control over them, you need to pay extra close attention to your average losses if you want to learn from your past errors.
Even when you complete your due diligence, a position can quickly shift against you, turning a winning trade into a loser.
Your ability to handle and control these circumstances will determine whether you are a successful trader or not. If you’ve ever found yourself in one of these predicaments, take a moment to consider how long you let the situation deteriorate before taking action and why.
You can find a terrible trading habit that is probably causing mediocre outcomes by concentrating on your average losses.
You’re probably holding onto your losing trades for too long. Most likely, you should clip them sooner.
To avoid suffering your average loss, try closing a lost trade early. You might notice a change in your performance right away.
Even if you are more incorrect than right, you can still succeed.
However, your average gains must be significantly more than your average losses.
In essence, you might not always be correct, but when you are, you are absolutely correct.
The simplest method to keep an eye on this is to calculate your trade expectation.
3. Calculate Your Trade Expectancy
Expectancy is the typical dollar amount you anticipate making or losing on each deal based on past results.
It combines your share of winning deals and the average profit made per trade with your share of failing trades and the typical loss made each trade:
Expectancy = (% Winning trades x Average gain) - (% Losing trades x Average Loss)
Let’s imagine that in the last three months, 30% of your trades were profitable and you made an average gain of $300 each trade, while 70% of your trades were unsuccessful and you suffered an average loss of $100 per trade.
According to the formula above, a $20 gain each trade should be anticipated on average.
Expectancy = (30% x $300) - (70% x $100) Expectancy = ($90) - ($70) Expectancy = $20
As you can see, expectation essentially refers to the typical sum you can anticipate earning (or losing) on each deal.
With each deal, you should strive for a rising anticipation.
If the contrary is true, go back at your losers to determine where any breakdowns may be happening.
Numerous novice traders are so preoccupied with their profit/loss ratios that they are blind to the existence of a wider picture.
Your anticipation has a significant impact on your trading results.
Summary
Regularly reviewing your performance can help you gain a better understanding of the actions and other elements that might be affecting the results of your trade.
A fantastic technique to find any flaws is to pay close attention to losses.