Quick….how many of your trades in the last 10 have been winners? What was your average gain and your average loss? How long does your typical trade last? Did you use the same approach on all of those 10 trades? These are some of the questions you need to able to answer in order to move up to the next level of trading. Analyzing your past trades is as important as thinking about your next trade. Most new traders want to ignore the losing trades and not even look at them again, but you must in order to improve.
If you won five of the last 10 trades, but were not profitable in the series, you need to lower your risk or look for more profit. If you used a couple of different strategies to find your entry and one was particularly profitable, you should do more testing with that strategy. But you cannot know these answers unless you keep track of what it is you are doing.
Many successful traders keep a log of their trades and also note what they were thinking at the time. This way they can go back after a series of trades and see what worked and what didn’t work. Professionals have a good idea of what works for them since they have probably been doing the same thing for awhile, but do you? Try keeping a log and record as much information as you can about each trade including: date, time, entry, stop, profit target, exit, results, and any other piece of information you might find interesting.
You should also write down why you entered into the trade and why you exited. This kind of information can take some time to write, but may be some of the most valuable information about how to improve your trading as you will ever read.
Heads I win….and tails I win too.
Because I get to work with new traders in our funded forex, I get a pretty good idea of why new traders lose money. One of the reasons is that these traders do not have an idea of what they want to achieve. Sure, everybody wants to make money, but we need to have realistic expectations to get to that level.
I like to compare trading to flipping a coin. If I paid you $1 every time the coin landed on tails and you paid me $1 every time the coin landed on heads. We could flip all day and night and most likely break even after every 100 flips. So how is this information useful to a trader? I like to recommend to new traders that they think in terms of winning half of their trades.
If you trade with the trend and only take solid setups, this can be done. But that is only half of the battle. If we win $1 when we are right and lose $1 when we are wrong, how can we make money? The answer is that we either have to win more often or win more when we are right. The idea then is to not win $1 when we are right, but to win $2 and still only lose $1 when we are wrong.
That is our 1:2 risk:reward ratio we talk about in trading. If you are risking 50 pips on the trade, you should look for twice that in profit, which is 100 pips. Now we can look at that coin toss differently. If I paid you $1 every time the coin landed on tails, but you had to pay me $2 every time the coin landed on heads, I would want to flip that coin 24 hours a day for the rest of my life. Even if I lost five flips in a row, I would still want to bet on that next flip because I know that after a series of 100 flips, I would still win about half and lose about half of the time. So no matter what happens on the next flip, I would consider myself a winner because after a series of flips, I would most likely be profitable. Heads I win…and tails I win too.