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Learning From Losses

Winners learn more from losses than from wins. When a profit is taken, there may be little room for improvement. When a loss is taken, a trader's self-discipline and self-control are the first things to be examined.

The second aspect of studying a loss is to see how the actual price action caused the loss. Was there a trend reversal; an unexpected gap?

Most beginning traders sustain losses due to emotional reactions. Traders should ask these questions: How could I have improved the trading results on this trade? What did I do right? What did I do wrong? What were the technical reasons for entering and exiting this trade? Lessons learned from a loss are the price of knowledge gained. It is for purposes of learning that a trader must plan to learn and learn to plan. Comparing actual actions and results with a trading plan will highlight where the trader went wrong. 

Consider the case of happy Harry: 

Harry saw prices in congestion. Harry was pretty sure that prices were going to breakout to the downside (opinion). Even though he knew that prices in congestion can breakout in either direction, Harry decided that there was no way that he wanted to miss the move. Therefore, he entered a sell stop 1 tick below the low of the congestion area. Of course, Harry was filled at the open of the following day, actually a couple of ticks lower due to a gap opening. 

Harry was sure he was right about the trade, so although the close worried him somewhat, he failed to realize that insiders tend to push prices back into a gap whenever they can. In this situation, there are two things to notice: 

1. Harry failed to exercise discipline. He let his opinion override his self-control.

2. Prices unexpectedly gapped, catching Harry with a very bad fill.

What happened in the following days? Prices turned and broke out to the upside of the congestion. And what about Harry? Well, Harry paid the price of his folly!



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Monday, 27 May 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.