Study Your Losses to Realize Gains
2 min read
Traders skills to show losses into gains. Rather than reflect past defeats, or trading losses, they use the setback as a motivator, a chance to hone their skills, grow, and improve. They examine what they did wrong, learn from their mistakes, and consider the temporary setback as a launchpad from which to realize higher future performance.
As traders, it’s crucial that you simply keep accurate records of all factors which will impact the result of your trades in order that you’ll learn from your losses, improve your performance, and do better next time.
Traders often look to the profit/loss ratio – that is, the proportion of the size of winning trades to losers – as a sign of success and profitability.
A profit/loss ratio in excess of 2:1 is often sought-after, but this simple metric can be a bit misleading since some trades are inherently riskier than others.
A profit/loss ratio refers to the size of the average profit compared to the size of the average loss per trade. The average gain versus the standard loss per trade also tells you ways well you’re managing and shutting out your positions.
Average profitability per trade (APPT) basically refers to the average amount you can expect to win or lose per trade. Most people are so focused on either balancing their profit/loss ratios or on the accuracy of their trading approach that they’re unaware that a much bigger picture exists: Your trading performance depends largely on your APPT.
This is the formula for average profitability per trade:
APPT = (PW×AW) − (PL×AL)
where:
PW = Probability of win
AW = Average win
PL = Probability of loss
AL = Average loss
Expectancy refers to the average dollar amount you expect to realize or lose per trade supported previous performance.
It combines your percentage of profitable trades and average gain per trade together with your percentage of losing trades and average loss per trade:
Expectancy= (% winning trades * Average gain) – (% losing trades * Average loss)
Armed with this data, one can study a series of losing trades and identify the factors that led to the trades going wrong. One can then change these factors in subsequent trades and monitor improvement. The key is to require an upbeat psychological approach. Rather than mulling over one’s failure, it is more useful to look at past failure as a chance to grow and improve. Viewing a loss as a growing experience changes your perspective immediately.
