Good and Bad Trades

There is an important distinction in trading between a good and a bad trade. A good trade is made with the probabilities in your favor; no matter what the outcome the right decision was made. An investor may make a good trade, and it can still result in a loss. A bad trade is made with the probabilities against you; no matter what the outcome the wrong decision was made. A bad trade can result in a profit. Good trades should eventually yield profitable results over time, while bad trades should provide unprofitable results.

If making money in the short term is the only criterion, then good and bad trades don't matter. But if you consider trading a business and attempt to keep the probabilities in your favor, it is important to determine whether you make good or bad trades. The same bad trade which makes money once or twice will eventually cause much more money to be lost.

Trading is a marriage of ideas and emotions. Sometimes the marriage appears to be an excellent mix, but other times the ideas and emotions conflict. Trading methods are embraced and well thought of when they make money. But when times get tough the trading rules often get abandoned because they are no longer considered of any use. One of the ironies of trading is that most enter with grand ideas of untold wealth, but the more successful stay with prudent visions of possible loss.

 

MAKING GOOD OF A BAD SITUATION

When experiencing a losing period it is important to make it as constructive as possible. Question your trading rules to determine if they are still valid or see if they can be improved. What about your money management techniques? Are you experiencing an extended series of losing trades, or was it one bad trade which caused the loss? Is your mental state contributing to the losses?

Adverse periods are certainly the hard part of trading, but they also may prove to be the most rewarding. Each bad period should make you question your existing strategies and cause you to develop even better trading methods and money management techniques.

We seldom have the desire to change strategies that work. Don't fix a clock that's not broken. But this kind of mentality discourages change and ultimately improvement of our-self. Of course, we should not look forward to the next bad time to improve our-self. Bad times may help to accelerate change and improvement, whereas complacency sometimes reigns when good times occur.