Losing doesn't always mean you've done something wrong
The 3 ways to categorized your losses & why this method builds consistency
There is no such thing as a perfect strategy in the stock market. It’s well known that you can make a fortune by only being right 30-40% of the time!
But, successful trading comes down to the other 60-70% of your trades. How you handle the losers is what really matters.
I’ve experienced losses this week, and upon my post-trade analysis, I realized they were just system losses. This is important for a couple of reasons, but the ‘macro view’ is that by categorizing my losses, I can better understand the fixes I need to make the following week to clean up my actions, my mentalities, or any other areas in my process that may be causing preventable losses.
While I’m analyzing my trades, these are the 3 ways I classify my losses:
1. System Losses
System losses are losing trades that occur just because they turned out to be losers. The plan, execution, market environment, and everything else that goes into a successful trade is there but the result is just a loss.
This is the side of trading that not many people talk about — there is nothing I did wrong and I still lose.
This classification is important for me because it eases the mental energy spent on a loss. I now can see that I acted within my system, there weren’t any mistakes made, and I can spend more mental energy looking at the other types of trades I take.
2. Poor Market Environment
In this scenario, I can be trading within my system or wheelhouse of setups and they fail due to market conditions.
Example: A breakout trader during a bear market.
The setup and execution may be there, but the overall market environment isn’t healthy for the system in place.
Being able to step back and understand that my edge isn’t working in the current environment is powerful and can help me avoid overtrading.
3. Out-of-System losses
Out-of-system losses are exactly what they sound like — trades that are taken that aren’t within my wheelhouse or system.
This could be trying to short (which is not in my planned trades this year), buying a different breakout strategy than the one I have, or literally anything other than focusing solely on the setups you are trying to execute this year.
This is the most avoidable type of loss and is one you should be trying to eliminate completely.
You’ll be surprised at your performance after a year when you look back and realize all the trades you’ve taken were within system.
Takeaways
As you review your trades and prep for the upcoming week, start to classify what type of losses you’re taking. Are they…
System losses
Losses due to poor market environment
Out-of-system losses
Realize that with system losses, there is nothing you can do. It is just a loss and part of the game!
Poor market losses are valuable because they tell you the current environment isn’t healthy to your overall strategy. This can help you reduce churn on your account and avoid overtrading.
If you take losses that are out-of-system, you are not implementing the necessary discipline required to be a great trader in the market. Define your best setups, know when they work, and don’t let yourself take any trades outside of your wheelhouse!