Well this is an area that I knew was a big deal even before it cost me a couple of hundred pounds today!
Ever trader will know that feeling of entering a couple of trades in line with their rules and losing them. If you are managing your risk right it might only be a couple percent over both trades, so think nothing more about it and lets move on! Well it rarely works quite like that. Today just after loser number two, another setup appeared…but it was worse…worse than either of the two losers! According to me (not my tried and tested system) this setup didn’t look as good so i waited for a pull back to enter. That’s right it didn’t pull back. It dropped over 100 pips in less than an hour and i wasn’t in.
I have just about got to the stage where I don’t immediately go and revenge trade and lose big because I hate myself and am a failure. In fact now i just closed down my screen. I know that is not the zen like solution of a super trader, but for me it works. It works because missing a win hurts more than losing. It is so important when you see a valid setup you remember that missing a win is the worst thing you can do. Particularly when my strategy is returning 3:1 or better reward to risk ratios. Missing a win is literally three times worse.
Although psychologically this may be true, I have also worked hard to include all of my missed trades in my record keeping. One of the revelations i had when reading M. Toma’s book about trading risk, was that missed trades exposed us to several different but significant risks. It is not simply the risk that the win loss ratio is thrown off balance, but it also creates an increasing lack of confidence in your strategy even though it was not at fault! So by recording your missed trades you are able to understand why you missed it and to work on improving your own performance, and you can still reflect objectively on your strategies performance and thus maintain confidence in a profitable system.
Traders journal was specifically designed to record each missed trade as if you had taken it. You then just highlight that you did not take it and why. Then on your personal dashboard (above) you can not only see how many valid setups you took and how that relates to the expected or tested results, you can also see how many you missed and why.
So why does it matter? I highlighted earlier some of the problems it can cause but the truth is that we are really good at blaming everything but our selves and really bad at being honest about our trading. It is also important to know if a trading strategy works for you. If you miss 10% of trades because you are at work, the strategy is not compatible with your current lifestyle. If you miss 15% of trades because of greed or fear, don’t beat yourself up about it. Speak to a trading friend (or even e-mail me) and understand why that is. For example day traders would freak out if they tried to adopt a longer term low win rate high reward trend following strategy. That does not mean the strategy doesn’t work or that you are not a good trader. It does mean that you need to find tools to manage your ongoing performance and to make sure that you highlight and address the realities of trading and then use them to always improve your self and your trading results.