You have heard the saying “you learn from your mistakes”, we all have.
Do you believe we actually learn from our mistakes?
I believe that we can learn from our mistakes but many of us don’t.
Every day I see newbie traders making the same mistake they made the day before. This is because they don’t know how to learn from their mistakes in Forex.
Learning from your mistakes in Forex is not something that just happens… It is something that you have to make happen.
Why don’t we learn from our mistakes
Think back to the last trade you lost because of a mistake. Do you remember the mistake you made? You probably do.
Now think back to every bad trade you took in the last six months. Do you remember all of those trades and the mistakes you made on them?
When you take a bad trade you may learn from it. However, what you learn is quickly forgotten.
If you truly want to learn from your mistakes you need to turn your mistakes into a lesson.
Turn mistakes into a lesson
Some traders tell themselves that every loss in a lesson. The truth is that you need to turn a loss into a lesson. You don’t learn by losing, you learn by analysing why you lost and planning out how not to do it again.
How do you turn losses into lessons?
1. Figure out why you lost
First you need to figure out why you lost the trade. Not all trades fail because of mistakes. Some trades simply do not work out. To figure out if you made a mistake start by asking yourself the two questions below.
- Did I follow my trading plan?
- Did I follow my money management plan?
If you answer now to either of these questions, you know you have made a mistake and you can move on to the next step. If you followed your rules and the trade didn’t work out you do not need to go on to step two.
2. Analyze the mistake
Next you need to understand what your mistake was specifically.
If you answered ‘no’ to the question about your money management plan, you need to analyze what part of your plan you did not follow. Maybe your stop loss was too tight or you traded too many lots. Whatever the specific reason is, you need to figure it out.
Once you figure out precisely what the mistake was, write it down. Use pen and paper or a Google/Word doc, whatever you are comfortable with. Here is an example:
EUR/USD Long @ 2014-01-10 03:00 GMT
Entry @ 1.3520 – Stop @ 1.3500 – Target @ 1.3600 – Stop was hit
Mistake: I was afraid of losing money so I set my stop loss too tight.
The first two lines are the trade information. This includes the date and time on line one. Followed by the entry, stop, target and result on line two. Finally on line three is the important part, the mistake you made.
3. Figure Out a Solution
This part is essential. Knowing you made a mistake is good. Not having a solution for that mistake is bad.
Once you understand the mistake, the solution is usually easy to come up with. Using the example I started above, here is the solution.
EUR/USD Long @ 2014-01-10 03:00 GMT
Entry @ 1.3520 – Stop @ 1.3500 – Target @ 1.3600 – Stop was hit
Mistake: I was afraid of losing money so I set my stop loss too tight.
Solution: I need to write down my stop loss rules on a piece of paper and review them before I enter a trade. I need to remind myself that my maximum stop is defined by my maximum allowable risk. So there is nothing wrong with using my maximum stop.
The key thing to remember when writing a solution is to be as detailed as possible. I could simply have written “don’t use a tight stop” but that would be of little use.
Why This is Important
Learning from mistakes is something you need to work on.
When boxers fight their coach records every second of the fight. After the fight is over, win or lose, the coach reviews the video. By reviewing the video the coach is able to spot all the mistakes his student made. Once the coach knows the mistakes he knows what his student needs to work on. This doesn’t just happen in boxing, it happens in almost all sports.
In trading I use a similar concept. I commit all my mistakes to paper. This way I can identify where I went wrong and train myself not to make the same mistake in future.
The idea is to make identifying mistakes and formulating solutions part of your trading plan. Once you incorporate the solution into your plan you will find it easier to avoid the mistake in future.
On that note, here’s some homework I would like fore you to do.
Think back to your latest losing trade and use the strategy above to analyses that trade. Make today, right now, the first step into turning your Forex losses into lessons. Don’t put it off.
When you do, let me know about it by leaving a comment below.