Some of the Best Lessons Come from Losing Trades

I had a good question from a trader today about my recent EURUSD order, which unfortunately ended in a losing trade. The conversation started with ‘Why did the trade not work out’? (This isn’t the good question I was referring to, that’s lower, but a good question all the same). Now this was an easy one to answer as it was clear cut. The EURUSD was in a nice short to medium term uptrend and was coming back to test support.

There was a bunch of long positions stopped out as Euro broke down through 1.2000. So we had the usual cleanout of stops below the hourly support line. We already had a range of European economic data which all came in slightly stronger. So after the dip lower the EURUSD looked even better for a move back towards 1.2050 and higher. There was just one last piece of data to come out: US Consumer Credit – which is Tier 2 data at the very best. Because this isn’t a major high impacting release I didn’t think much of it and that’s where I went wrong!

The US Consumer Credit data came out huge….much stronger than forecasts and caused the USD to rally, pushing the EURUSD lower straight away…and the rest is history. This is all about attention to detail and not getting complacent on lower tier data. Understand this: Tier 2 or 3 data (less impacting data) can have a major impact IF there is significant variance in the data.

I discounted the possibility of this and paid the price…it cost me a trade.

OK so this leads me into the good question: If I can’t really be confident of the trade how am I supposed to be confident placing orders in the market? 

This question touched on a number of things that I thought worthy of sharing with everyone.

First: you can never be certain 100% that a trade is going to work. Regardless of what has come out or been said, there is always the chance of something random happening that messes things up.

Second: Our job as traders is to assess and manage the risk…. that’s it, plain and simple.

Match the Opportunity with your Recent Performance

Let me run you through the process of identify the Opportunity and then matching it with your recent Trade Performance to work out your ‘Trade Size’.

First of all you need to be fully squared away with the ‘Four Consecutive Loss Rule’ (4CLR) as this sets the benchmark for your Dynamic Capital Management System. Once you have the drawdown levels you now have parameters to work with and this is extremely important to stop you over trading.

Second, do your assessment of the market as per normal to try and find the ‘next best trade’.

If you see an opportunity that sticks out, then ‘micro-analyse’ it:

  • Check to see if there is any economic data coming out that may impact the pair.
  • Check the short & medium term direction – make sure they line up. (By the way that doesn’t mean the move can’t go against the current direction).
  • Check the correlations & the crosses …basically ‘micro-analyse’ the opportunity.

What you’re trying to work out is ‘how good really is the trading opportunity’.

I have my own ranking system that put into play on all trades & this helps me easily decide what trade size I should go with. Generally speaking, the better the trading opportunity, the bigger the trade size.

An awesome trade – fundamentals & technicals all lining up + fresh data to drive it = full trade size (potential to leverage up if I’m on a winning run)

A pretty good trade – fundamentals & technicals all lining up = half the trade size

An OK trade – fundamentals neutral & technicals solid = a quarter of trade size

Once you have your own ‘ranking’ system it will make the decision of what trade size to place very easy.

Third, check your recent trade performance.

Was your last trade a winner or a loser? How many losing trades have you had in a row?

This will determine how much you have available to trade before you start thinking about leveraging up. Obviously this is where the 4CLR comes into play.

Fourth, bring it all together.

If you go through this process correctly you should have a clear idea of what trade size the opportunity deserves. You should also know from your recent trade performance how much you have in the account to trade. If you haven’t had any losses then you can easily stick to your ranking system & trade that size. If you have had some losses then you need to tweak your trade size. For example if you have 2 trades before you have a drawdown then you really only have a maximum of 2 trades available. So if the opportunity is ranked only as OK then you should be reducing your trade size considerably and not thinking about anything else. This is where your trading performance merges with the trading opportunity. It will keep you out of trouble and prevent you from over trading.

So back to my answer for the question asked earlier

If I can’t really be confident of the trade how am I supposed to be confident placing orders in the market? 

Answer: You should have some level of confidence with every trade you put on. If you have no confidence at all then the trade is not the right one.

Awesome trades where you have huge confidence usually revolve around changes in policy from the central banks. In this day and age they are few and far between so we generally continue to trade trying to take cash out of the market as we await these awesome trades. But even when you are confident it can go against you so the only way to place orders in the market is to ‘scale your trade size’ according to the ranking of the opportunity combined with your recent trade performance. That way you have money in the game without risking the kitchen sink if the opportunity isn’t awesome. This allows you to constantly place orders and give you the chance to keep building your account even when the opportunities aren’t awesome.

And this is exactly what I did with the EURUSD trade yesterday.

Of course I was disappointed I lost cash on the trade, but I wasn’t particularly bothered because I only had half the trade size on the opportunity.

So it’s water off a ducks back. If I had of loaded up I would be putting my account under pressure and that can lead to all sorts of performance anxiety and major drawdowns.

The Key is to Get Your Own Ranking System that Makes Sense to You

To progress as a trader you need to take our trading methodology and make it your own. This is also goes for your ‘ranking system’ if you’re going to use my approach. The best thing is it takes the decision of ‘how much to trade’ out of your hands. It comes back to your system!

And that’s exactly what you need. Your job is to find the trades. Once you have identified the entry levels the system takes over.

Your trade plan and dynamic capital management system takes over.

Funnily enough we’ve already incorporated this system into the Scaling Plan for the T4TCapital Trading Programme.

Because we can’t be sure of your structure and assessment we have incorporated this whole system into the program to ensure you don’t mess it up.

I hope that helps you with determining your trade size. If you have any questions or comments post them at the bottom of this article.

Brad