Examine Your Setbacks in Order to Make Gains

Traders are frequently so preoccupied with their winning transactions that they completely overlook their lost trades.

But it's through your lost trades that you'll get the greatest knowledge.

Here are three methods for gaining knowledge from failed trades.

1. Assess your performance

Look up any previous trades you've made. If you can't find them, seek assistance from your broker.

Gather your profit and loss information so you can start analyzing the aspects that influence your overall success.

Now, calculate your Average Gain:

Total Gain / of Profitable trades = Average Gain

Next, calculate your total loss:

Total Loss / of Unprofitable trades = Average Loss

Once you have both statistics, you can plot them as a ratio to see where your earnings and losses are coming from:

Average Gain / Average Loss = Profit/Loss Ratio

Assume you have ten profitable deals with an average gain of $200 per trade and five unprofitable trades with an average loss of $300 each trade:

$200 / $300 = Profit/Loss Ratio 0.67 = Profit/Loss Ratio

The magnitude of the average profit relative to the size of the average loss per trade is referred to as the profit/loss ratio.

Because your average gain is $200 and your average loss is $300 in the example above, your profit/loss ratio is 0.67.

As a result, your average profit is only 67% of your average loss.

To put it another way, you lost 1.5 times as much as you made ($300 average loss vs. $200 average gain).

Fortunately, you won 10 of the 15 trades.

Your winning percentage was 67%.

# of Profitable trades / Total trades = Win Percentage 10 / 15 = Win Percentage = 0.67 or 67%

The average profit vs. average loss per transaction also indicates how well you're managing and closing out your trades.

• If your average loss is more than your average gain, consider whether you keep to your original trade plans or stray from them.

• What factors impact my decision to exit profitable trades？

• Do I exit unsuccessful transactions according to my risk management principles or do I cling on to losing trades for too long？

You can detect shortcomings and develop better trading habits over time by answering these questions.

2. Go after your losers with a hammer

If you want to learn from your past mistakes, you should pay special attention to your average losses because they are the ones over which you have the greatest power.

Even if you do your homework, a position can quickly shift against you, turning a winning trade into a loser.

It's how you handle and control these events that will determine whether you succeed as a trader or not.

If you've ever found yourself in one of these circumstances, take a step back and consider how long and why you let the problem slide before taking action.

Concentrating on your average losses can assist you in identifying a bad habit in your trading method that is most likely contributing to your lackluster outcomes.

You're probably letting your lost transactions run too long. You should probably clip them sooner rather than later.

Exiting a losing trade before it hits your average loss is a good idea. It's possible that your performance will increase right away.

It is possible to be more incorrect than right and still come out on top.

However, your average gains must be significantly more than your average losses.

In general, you may not be correct all of the time, but when you are, you are absolutely correct.

The simplest method to keep track of this is to calculate your trade expectancy.

3. Determine how long you expect to be in business

Based on historical performance, expectancy is the average dollar amount you expect to win or lose per trade.

It combines your winning trade percentage and average gain per trade with your losing trade percentage and average loss per deal:

Expectations = (percent Winning trades x Average gain) - percent Losing trades x Average Loss)

Let's assume 30% of your trades in the last three months were profitable, with an average gain of $300 each deal, and 70% of your trades were unprofitable, with an average loss of $100 per trade.

You should expect an average gain of $20 each trade based on the calculations above.

(70 percent x $100) – (30 percent x $300 = Expectancy ($90) - ($70) = Expectancy $20 = Expectancy

As you can see, expectation refers to the average amount you can win (or lose) per trade.

With each deal, you should strive for a higher level of positive expectation.

If the contrary is true, look over your losers again to determine where the problems are.

Many rookie traders are so focused on their profit/loss ratios that they are completely clueless of the wider picture.

Your trading success is primarily determined by your level of expectation.

Summary

Regularly reviewing your performance might help you better understand the behaviors and other factors that may be influencing your trading.

Paying close attention to losses is an excellent method to spot any flaws.