Trading Smarter: Turning Losses into Lessons and Building Better Habits #238
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Welcome back to the TradeCity Traders Improve podcast. My name is Rolf and I am your host. I am the co-founder of TradeCity.com and the Edgewonk.com trading journal. And I am back. I have committed or I am committing to regular podcast episodes once again. I have received so many emails over the last few weeks and months that traders are missing my podcast and

That encouraged me to revive the podcast and to release weekly episodes. I have made a list of a lot of trading topics that I will discuss over the next few months, so you can be sure that there will be regular updates again. And I'm always looking forward to hearing from you via email or social media. So let me hear and reach out what you think about my podcast.

And today I want to talk about a very crucial subject, but it's often overlooked. And it's understanding the difference between losing streaks and mistakes.

And this distinction is essential for anyone who wants to achieve long-term success. So let's get into the episode. First, let's talk about something every trader faces: Losses. But not all losses are created equal as we're gonna see. You have what I like to call good losses and dumb losses in trading. So good losses happen when you stick to your trading rules and your strategy, but the market just doesn't swing in your favor.

And those good losses, they are part of the game and over the long term you should make money even with occasional losses. And the main reason why traders struggle with accepting good losses is because of a lack of experience and not having enough data.

And that is why I'm such a big fan of backtesting. The traders that I mentor and work with in my mentoring program, I always recommend to them that they should spend a few hours over the next few weekends on backtesting their trading rules across different markets and across different time periods. And by the end, you will end up with a good amount of data and you will see that taking good losses occasionally is not a problem for your long-term profitability.

You can easily lose 4 or 5 times out of 10 trades and you can still make money long term. And this realization can be a huge aha moment for traders. You will also get to know your strategy very very intimately over backtesting for a few weeks. So if you haven't done that, I would highly recommend that you write down the rules of your trading system as precisely as you can

And then on the Saturday or Sunday, take two or three hours, set aside them and backtest a few weeks of price action. And on the flip side, dumb losses are those losses that happen because of unforced errors. And this means we are breaking our trading rules, we are jumping into trades without a plan and we let emotions take control over our actions.

And those losses have to be avoided. If you've been following the Edgewonk.com YouTube channel, I have done regular reviews of journals from our Edgewonk users and there are some really fascinating insights that have come up repeatedly over the last few videos and the reviews. And I've often seen journals where traders have a mix of dumb losses and good losses. And the fascinating thing is what I've seen a few times now is that

When you filter out the dumb losses, those unforced errors, a losing trader suddenly can become a profitable trader. And what this means is that at the core, the strategy is performing quite well and the strategy is actually making money. But those dumb losses, those unforced errors that happen from time to time, for some traders they happen more often, they are costing you all of your profits.

And this realization, when you dig into your trading journal and then you see your strategy is making money week after week, but you are the one that just cannot sit tight, that is doing those unforced errors, that's what is costing you your trading career. That can be such a big realization once you are able to distinguish between good losses and dumb losses or those unforced errors.

And recognizing this difference is key on another level. Why? Because it's not about avoiding losses entirely in trading. That's not the point, it's not possible, it's not even necessary. It's about minimizing unnecessary losses and then learning from every experience. And to reach that level of understanding, you need a process-oriented mindset rather than a results-oriented one.

And what this means is that if you're only focusing on your win rate or your bottom line, so how much money you are making, you might be tempted to take shortcuts in your trading. You might ignore your trading strategy or you're forcing trades to make up for a bad day to get back to break even or to reach your trading goal that you have set.

A process-oriented mindset, on the other hand, means that you are evaluating yourself and your trading based on your actions and how well you are executing your trades, not just based on the results. You are asking questions like: Did you stick to your trading plan?

where your entries and exits well-timed and disciplined. And such an approach will help you refine your skills and it helps you avoid burning out once you're able to look past the noise and once you are focusing on what you can control because you cannot control

on how many trading opportunities you can get every day or every week, but you have full control over how well you are executing your trades. So focusing on what you can control instead of things that are outside of your control will put you in the driver's seat. It will empower you. It will give you confidence once you realize that you actually have control over what is happening in your trading.

Another tip is that after every trade, especially losing ones, take time to reflect and ask yourself the three following questions: Did I follow my trading rules? Was there a clear reason for entering this trade or was it impulsive? And finally, what factors influenced me that I wasn't aware of at the moment?

And such reflections allow you to see if there are patterns in your behavior like chasing trades or acting out of FOMO, maybe closing winners too soon, maybe over leveraging. And another thing that I would recommend in this context is that you are looking for one thing that you want to improve upon next week. And this is what I do with my traders, but also with our Edgewonk users. At the end of your trading week, you look back at all of your trades

and you are identifying your biggest flaw or you're looking for a pattern that keeps repeating and keeps coming up in your trading and you write down the lesson or the thing that you want to improve you write it on a post-it note and you put it next to your screen your trading monitor

And then you don't repeat it next week, you try to actively work on it and by putting it out there, writing it on a post-it note and seeing it in front of you all the time, you're more likely to avoid this. And over time, if you can fix one thing every week, you will have made huge progress after a few months or after a year. Here's another trap that many traders fall into and it's setting arbitrary return goals.

And when you are a trader who is using rigid goals like I need to make 10% this month or I need to take a trade every day, this can lead you to forced trades even when the market is not setting up for your trading strategy and when there are actually no signals. And you have to remember that trading isn't a typical 9 to 5 drop.

The market dictates the opportunities and not your calendar. So you need to focus on what's available and you need to be content with taking what the market offers. You have to get away from this rigid thinking that you need to trade every day, you need to have a certain number of trades every week, and you need to realize a certain percentage return every week or every month. And again, that's when we come back to backtesting.

After you have backtested your strategy for a good amount of sample size on historical charts, you will also understand and see how many trades can you expect per week, per month, and what is the average return that you can expect over 6 months, 12 months, 24 months. And that is also going to help you put your mind at ease once you understand what to expect from your system. And you don't have to force trades or you don't have to set those arbitrary rules.

Another important advice I have for you here is that you need to know when to step away from your trading screens. And sometimes when we enter trades out of sheer boredom or there's this pressure that you want to trade all the time, it's important that you are taking regular breaks to clear your mind and that will make a huge impact on your well-being and your mindset as a trader.

So if there are no setups, get away from the screen, don't keep looking at charts when the market isn't doing anything or when it's not setting up. And that will help you stay focused and it will help you avoid a lot of problematic trades that are unforced errors. When we talk about losses, we also need to talk about risk and especially excessive risk or a lot of noise.

And sometimes we get caught up in taking big risks, either from overconfidence or maybe desperation to recover from losses, or because we are just chasing our arbitrary goals and return goals that we have set. And if you find yourself taking risks that don't align with your strategy and that make you feel uneasy, that it's time to reflect on why you are doing it. What is causing your trading behavior?

And recognizing these factors can help you rein in risky behavior and stick to a more sustainable approach. In Adrong it's very simple. You go to the chart lab and then you look at your risk distribution and there we break down all of your trades based on how much risk you have taken. And very often I see traders have problems with excessive risk so they have occasional large losses.

You don't need to have a lot of large losses to cause problems, but if you see occasional large losses, that can often be then a stepping stone to even more problems later on.

on the other hand if you see that you are constantly having problem with staying in winning trades and you are always tempted to close your winning trades too soon you don't feel comfortable letting your trades run that could also be a sign that you're taking too much risk on average so scaling down your position size can often help you mitigate a lot of those problems that come with taking too much risk

So if you have problems with managing your trades and staying in winning trades for too long or until your take profit is reached and you're always closing your winners too soon, make sure to also analyze your risk management and maybe for another week or maybe for a month, try using a smaller position size. And I've seen that this will make a big difference on many traders. So let's wrap this up with a few action steps that you can apply to your trading routine starting today.

First, you have to distinguish between good losses and unforced errors. In EdgeWrong it's super simple. You can just tag your trades and then look at the tiltmeter. Did you break your rules on a trade? Did you follow your trading rules? And you need to recognize when losses happen due to market conditions versus when they are the result of broken rules. Which means, did the trade just not work out but I followed my trading rules? Then that's a good loss.

Or did I take a completely random trade that I shouldn't have been in? That's a very important distinction to make. Second takeaway: You need to shift to a process-oriented mindset. You need to evaluate each trade by the quality of your decisions, not just based on the results. Reflect regularly on your losing trades.

so you need to find patterns or mistakes that you can avoid in the future again i would recommend to set a a goal or to write out what you want to work on for the next week and that will be the focus of your trading for the next week

4. Avoid setting rigid profit targets. Instead, take what the market gives you and don't force trades that aren't there. Backdesting comes in here once again as I've explained. Know your numbers and then you will be able to realize what is realistic, what can I expect and that will help you put your mind at ease.

And finally, you need to be mindful with excessive risk taking. So first of all, avoid large losses, but also in general, monitor your position sizing, your risk management, and see if that is maybe a source of problems for you where you're taking on average too much risk. Your trades are generally a little bit too large and you don't feel comfortable with your trades.

So I hope that helped. I hope this podcast episode gave you a few things to think about. Even if you can just have one takeaway from this podcast, I think it should be worth it and you will be able to make a difference in your trading. You will hear from me again next week. Until then, happy trading.