Why Trader Should Love Correct Losing Trades

[cornixforex 10]

First of all, what are "correct" losses vs. "incorrect" losses? Correct losses are your safety net. They are the result of your hard work of back testing and forward testing and constitute the optimal way to control risk for an outright forex trader.

 

You know that you only want to risk a certain maximum amount of pips and you control that by placing stop-loss upon entering the trade. This is essential part of almost any consistently profitable trading system. And when such "good" loss occurs, you know that it is not a problem, just the opposite, it is the part of normal trading routine. And you should like the fact that everything is going right, as planned.

 

Incorrect losses, on the other side are those which are not planned or even worse, are caused by impulsive, emotional actions of a trader.

 

Unplanned losses are pretty hard to control and you must be ready to the fact that some day they may happen. Sudden market spikes, caused by unexpected news, central bank interventions etc. All of them may cause slippage through your stop-loss order and bigger loss as a result. This is just one of many outright trading risks, we must simply accept this truth of reality. But this fact reinforces the need for a stop-loss. Because slippage through it is one thing, and totally uncontrolled move against you is the other, much more ugly.

 

Impulsive, caused by emotions losses though, are the worst kind of all trader's losses possible and must be eliminated, because it's them which lead to dramatic hits or in the best case, to an absense of ability to trade profitable on a consistent basis.

 

The examples of such losses are: market is moving against you, but you move your stop-loss "just a bit" further from initial amount, because you hope (you may think you know, but you never know anything for sure about the market) that price will come back and make you money. Or even worse, you average down in an unplanned way (planned average down can be a legit trading or investment strategy), also in hope it will eventually come back.

 

Result of such "innovations" is always the same: you end up losing much more than you planned or even turn profitable trading method into a losing one.

 

So it's always good to remember: our profitable trading strategies are product of serious efforts, our home work and practical experience of interaction with the market. Our stop-loss amount is such for a reason. So we should never change something in our strategy only cause it feels so on a single trade. If we see effectiveness of a method drops over time, we should stop trading it live and on full size, do some home work and find out the reasons for that. If objective reasons do exist (which is not always the case), then we should develop some modifications which would adjust our method in the correct way. And then we execute the modified method with the same discipline as we did before.

 

But such decisions must always come from intellect, not from emotional impulses...

[Tams 20]

the problem is, people are celebrating the "incorrect" wins.

[cornixforex 10]

the problem is, people are celebrating the "incorrect" wins.

 

Yes, definitely. Agree with that remark.

[MightyMouse 12]

Incorrect losses occur when you either should not have gotten into the trade, you stayed in longer than you should have, or you got out earlier than you should have.

 

It is exactly the same for wins; however, if you can trade, then you can certainly ride an incorrect win to a really nice win and overcome all your incorrect losses. The rigidity that comes with logic really doesn't belong in the market. Use the other side of your head.

 

Keep losses small and ride a winner until it is drained.

 

What happens after you get in is far more important than what happened before you got in.

[cornixforex 10]

IMO, incorrect wins and losses should both be eliminated from the trading, because they are result of impulsive actions (aka gambling) as opposed to rule based systematic trading.

 

If you treat it as a serious business, you should not act impulsively.

[MightyMouse 12]

IMO, incorrect wins and losses should both be eliminated from the trading, because they are result of impulsive actions (aka gambling) as opposed to rule based systematic trading.

 

If you treat it as a serious business, you should not act impulsively.

 

Ideally, yes they should be eliminated. However, most situations are not ideal.

[cornixforex 10]

Ideally, yes they should be eliminated. However, most situations are not ideal.

 

Not ideal, but following your own rules is not necessarily an ideal situation, rather usual common sense.

 

And all trades executed according to rules are "good" in my opinion, doesn't matter winners or losers.

 

Assuming of course, that rules are part of the system proven to have an edge.

[MightyMouse 12]

Not ideal, but following your own rules is not necessarily an ideal situation, rather usual common sense.

 

And all trades executed according to rules are "good" in my opinion, doesn't matter winners or losers.

 

Assuming of course, that rules are part of the system proven to have an edge.

 

Rules are important but mistakes are to be expected and you can still make money even though you make mistakes.

[cornixforex 10]

Rules are important but mistakes are to be expected and you can still make money even though you make mistakes.

 

Well, there are mistakes and there are mistakes.

 

Taking profits on a trade a bit too soon is a mistake, but it will not wreck trader's account all at once.

 

Not placing a protective stop on the other side is a mistake, which should never be committed no matter what.