Saturday, June 20, 2009

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Learn to Take Lessons from Your Losing Trades

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What makes the difference between an experienced trader and a novice trader? Is experience just about passing time with one stock trade after another? Or is there something smart that a trader should do before he/she can be considered an experienced trader? Well, the answer to all of these questions lies with the ability of the stock trader to take lessons from his/her losing trades.

Many stock traders trade stocks just by the urge. They are not disciplined in their trading. Their plans of trading transactions are not organized. The moment is enough to catch their instinct and execute a trade. Well, not all traders are like this. But there are certainly different levels of traders who are smart in their trading.

How to Determine if Someone is an Experienced Trader?

The different levels of trading expertise come from two different aspects. One is the amount of time a trader has spent trading in his/her life. The other is the qualitative lessons that the trader has taken from his/her losing trades. To truly call yourself an experienced trader it is not just time that is important but also the lessons that you learned from each trade and applied for future trades.

Never let your trades just go away in the sands of time. There is always a lesson to learn either new or the same old lesson but with a different perspective from every trade that you execute throughout your life as a stock trader.

The successful stock traders are made by their consistency of making right bets. And this is possible not with inherent skills or something but with the persistent will of take lessons from seemingly simple things and applying them to avoid catastrophes in the future.

You Did the Same Mistake Again, Right?

How many times can you remember doing the same mistake that you did in your first trades? For my case, I had spent my initial months of trading just without any plan or discipline. But at the same time I was looking for information from expert traders that must have left some information on the internet. Though nobody gave the exact information that I was looking for, everybody spoke about the importance of a plan for your trading. Without a plan you can be sure to leave all your money in the markets at some time.

It is not just an organized planning that makes best trades but it is the lessons learned from old trades that lets you trade right consistently. Remember consistency is the key to long term success in your trading. If you cannot even try to improve consistency then you should better close your trading accounts right now.

How to Learn Lessons from Your Stock Trading?

The best way to learn lessons from your trades is to note them down in your trading journal. Earlier I have written about this in Why You Should Keep a Trading Journal to Track Your Trades? There is enough info. to learn the importance of it. The most important and direct advantage you gain from this is the ability to learn lessons by yourself without help from anybody else. You can truly shape yourself as an expert stock trader whose bets hardly go wrong by taking note of every trade on your journey in the stock market.

When you are noting down your trades, you should make sure that it is easy to recover the information related to the reason for entry, price, profit/loss, quantity, reason for chosen quantity, exit plan, reason for exit, etc. The key is to keep it simple. The best tool to use can be a spreadsheet where you can make different columns for each of the key points related to a trade and add each stock trades chronologically with each row.

Noting it on a computer makes it easy to edit and keep clean, also able to add more columns later. But a real note book can also be helpful in a different way. Choose something comfortable to you.

Be Careful About Misleading Lessons!

You can also learn lessons from profitable trades. But the lessons you learn from these can sometimes be misleading. Even the lessons from losing trades can be misleading because for unexpected reasons you might end up in closing a trade with loss. But perhaps it could have been closed with a stoploss as it was a good bet went wrong due to trend reversal of the market. Then how do you resolve this problem?

It is simple. Remember as I mentioned earlier, the stock market is like a stochastic process. It does not vary just in samples of time but also in samples of stocks and circumstances. There is randomness to it. But you can gain powerful conclusions when you increase the sample sizes as done in statistical analyses of random variables.

Similarly to learn best lessons from your past trades, you should take lessons based on the number of such instances. If a bad trade happened only one time and not repeated as much time as other bad trades, when repeated with similar conditions, that does not have any lesson to learn other than that it is part of the random nature of reality. But if you find that some type of your behavior in executing an entry or exit a trade is consistently resulting in bad bets, then there is good lesson to learn from it. Learn not to repeat those conditions for future trades.

Mine is an Evaluated Trading Experience

Even though I have a trading experience in time of only two years, I consider that I have good experience in trading that I can help others with my principles. This is because my trading expertise does not come just by the time I had traded and the number of trades in the two years but from the evaluated experience I got from learning lessons from past trades.

I have seen many fellow traders both online and offline who just don’t get over certain mistakes. I had even advised them to start a trading journal. Even though they bite their tongue every time they repeat a mistake they never consciously tried to learn some lessons from losing trades. That is what has separated me from such traders.

There are also people who are elder than me and advised not to go for trading. They themselves don’t have much to offer in the form of lessons than telling the same old lessons like diversify, go long term etc. This is because though they have experience of years, they don’t have lessons learned from their trades. Their trading just goes much in the same way as their life just moves on.

I don’t want to offend such people, but my intention is to highlight the importance of seemingly simple thing as noting down your actions. If you are in a different profession, don’t you maintain a dairy or something similar to note down what you accomplished, planned or lessons learned from the day or week or month’s work? Same holds true for the stock trading as well.

Learn Constantly for Long Term Success

It is never too late to learn stock trading principles. Knowing the importance of right principles thoroughly from all perspectives, even if few, helps improve the consistency of your next trades. Remember the success in stock trading comes from the consistency of right bets. And that happens only by constant learning.

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