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How To Learn From Your Mistakes And Shortcut Your Trading Success 

 June 16, 2020

By  Rayner

Last Updated on

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In this episode, you’ll discover how to learn from your trading mistakes and shorten your learning process.

So listen to it right now…

Resources

How to Create a Trading Journal and Find Your Edge in the Markets 

How to be a Profitable Trader Within the Next 180 Days (Even if You’re New to Trading) 

Transcript

Hey, hey, what’s up my friend? In today’s episode, I’ll be discussing how you can learn from your mistakes and flatten your learning curve.

Because here’s the thing, trading is not as black and white as it might appear to be. For example, you can make money on poor trading decisions, and you can lose money on good trading decisions. But how do I know what’s right and what’s wrong?

This is why it’s important to understand your trading mistakes to avoid making them. Because in the grand scheme of things, these are the ones holding you back, although they might not be prominent in the short term.

First and foremost…

1. Set up a trading journal

I know most of you are thinking, “Rayner, trading journals are boring stuff. I want to know the strategies, the techniques, the patterns!”

Here’s the thing, many traders out there just focus on strategies, patterns, tactics, but only the minority of traders who are consistently profitable look at their trading journal to see how they can improve their trading results.

You must have a trading journal if you’re serious in this business. You must have a way to record down your performance and a trading journal will help you with it.

If you’re clueless about it, here are a few basic things that you need to have.

The type of trading setup you’re taking

Are you trading a breakout? Are you trading counter-trend or are you trend-trading? You need to filter down and write down the type of trading setup that you just took.

Your entries, exits and stop loss

These are the basic metrics that you should have.

Your overall profit or loss on the trade

I like to write it down in terms of R. But you can just simply treat it as your risk-to-reward on the trade.

For example, if you risked $5 and made $20 that’s a risk-to-reward of 1:4. In terms of R-multiple, you’ll write down 4R. But if you hit a stop loss, that’s a loss of 1R.

That’s pretty much what your trading journal should have at the bare minimum. And if you want to take things forward you can you screenshot your charts of when you entered and exited the trade. Those are also very important stuff.

This is the rough idea of what your trading journal should entail. Once you have your trading journal, I hope you’re consistently recording down your trades, because once you have a decent sample size of trades, that’s where the magic begins.

And trust me when I say you’re already ahead of 90% of traders out there at this point because they don’t even record on their trades. Some of them don’t even know what a trading journal is.

Once you have a sample size of 100 trades, let’s say 100 breakout trades, you’ll have 100 lines in your trading journal. This is where the magic happens.

2. Use your trading journal to identify your losing trades

If you think about this, in trading, your trade can only end up in one of these few ways:

  1. Large winner
  2. Small winner
  3. Breakeven
  4. Small loss
  5. Big loss

So the first thing that we want to tackle is your large losses. Because if you can contain your large losses, you’ll be much closer to becoming a profitable trader.

You’ll have to find the large losses which are more than 1R, and ask yourself, how did it happen, why it happened and how you can avoid it.

If you looked at your trading journal and you realized that there are certain trades which are a loss of 4R or 5R, meaning 4 to 5 times what you planned to risk, then ask yourself why that happened.

Is it because you’re trading in a market, let’s say a stock market, that has low liquidity stocks, and by the time you exit your trade, the slippage is huge and against your favour? If that’s the case, then you’ll have to avoid trading this type of low liquidity stocks.

Or maybe let’s say you had a large loss because you didn’t follow your rules because you felt uncomfortable taking the loss. That’s why you hold onto it longer and your loss snowballs into a larger loss.

If that’s the case, then you must take preventive measures so that it doesn’t happen again. One way to do it is to make sure that the pain of breaking your rules is greater than the pain of following your trading plan.

For example, if you don’t follow your rules, you make a promise to yourself that you’ll donate $1,000 to your favourite charity. Clearly, the pain of donating to charity is greater than the pain of taking the loss (something along those lines).

Or maybe you’ll have to run 10 kilometres around the park or something like that. Make sure that the pain of breaking your rules is greater than following the rules.

This is an example of how you can identify your largest losses and prevent them from happening again.

3. Use your trading journal to identify patterns that lead to your losses (and avoid them)

Let’s say you trade breakouts, and you have recorded 100 breakout trades. You might find certain breakout patterns tend to fail when you’re trading against the higher timeframe trend. Those breakout trades have a low probability of working out.

If that’s the case, then you want to avoid trading breakouts when it’s against the higher timeframe trend.

You’ll only know this once you’ve reviewed your trading journal after you’ve recorded your trades and looked through your charts to see what are the patterns that lead to your losses.

And finally…

4. Use your trading journal to identify your small winners (and why it occurred)

There’s nothing wrong with small winners. For example, if you follow your plan where you’re using a trailing stop loss technique, but market retraces and hits your trailing stop loss, and then you end up with a small winner or a breakeven trade, that’s fine.

The problem is if you were having a small winner because of breaking your rules and letting your emotions came into play. So this is where you ask yourself, why did you break the rules.

Again, you must do something to make sure that the pain of not following your rules is greater than following your rules.

So these are the few things now you must do to achieve trading success and flatten your learning curve.

Let’s do a quick recap…

Recap

  • Set up your trading journal – this is the only way to get started in the right direction.
  • Identify your largest losses out there and ask yourself why it happened and how you can prevent it.
  • Identify patterns that lead to your losers and how you can avoid them.
  • Identify your small winners and ask why it occurred, is it because you’re following your rules? Or is it because your emotions come into play? Fix this issue as well.

With that said, I have come to the end of today’s episode and I’ll talk to you soon.

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