Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
One of the hallmarks of a good trader is how they handle their losses. Rather than getting enraged or depressed, they become curious.
Many retail traders blame the market, hedge funds, brokers, or whomever they can.
It’s always a conspiracy of some sort.
They readily take credit for their wins, but never their losers.
As Edwin Lefèvre remarked in his trading classic, Reminisces of a Stock Operator,
“If a man didn’t make mistakes he’d own the world in a month. But if he didn’t profit by his mistakes he wouldn’t own a blessed thing.”
This is some sage advice published way back in 1923. The market has changed – human psychology hasn’t.
Analyzing your losing trades is a bit of advice without an expiration date.
I’ll assume you have a basic trading plan and some rules for entering and exiting your preferred trades. Also, you MUST be writing down the conditions under which you got into and out of your positions.
Without data, you cannot fix your trading problems.
Let me emphasize,
“If you aren’t following a plan and have no rules, you have no business with a trading account. You CANNOT win in the long term without them.”
So, what types of questions should you ask when your trade comes up as a loser?
How do you find out what you did wrong?
As a critical first step, just be honest and ask yourself if you made the trade based on your own trading plan and rules. I know as well as anyone that having rules and sticking to them are two completely different things.
So did you follow them?
If so, congratulations! We can move on to the next step. If not, then tighten up your game and do what you’d planned to.
If you’ve been following your rules, then the analysis becomes simple.
Rules that consistently win should be retained, and those that set you up for losses should either be scrapped or refined.
For new traders, I find that the following three areas are often the cause of most losses. Fortunately, minor adjustments can dramatically improve your win rates and your profits.
Did you execute the order correctly?
There are always more new traders than seasoned ones, it seems, and there’s a definite learning curve on proper order entry.
No one is around to select the options and place the order but you.
So did you do it correctly?
If not, then make sure you have those orders down cold by paper trading first. Don’t learn your platform with real money on the line.
Even seasoned traders make mistakes on this, though. Human error is inescapable.
However, if you’re consistently sloppy with your orders, it’s going to get expensive. So always double-check the trade specs before you hit ‘place order.’
Did you enter on the wrong setup?
Look closely at the setup that prompted you to enter the trade.
It may have been perfect, but still led to a loss.
If your setup’s win rates are low, you might need to discard it or make adjustments. Of course, no single confluence of technical signals is perfect, but it has to turn a profit.
Maybe the setup doesn’t work well on that stock. Or you could have been right, but just too early.
All of these issues can be fixed if you take the time to find them.
Did you use the wrong strategy for the underlying?
Whether you’re bullish, bearish, or neutral, there are numerous options strategies to choose from. However, not all of them work equally well in every condition.
Make sure your strategy fits the underlying stock.
Perhaps you bought calls on a rising ticker when they were priced too high. If you overpay, you can lose money even on a big run-up.
Or maybe you bought a put spread on a stock that was far overextended in price.
Your risk far exceeded your potential profits, and a quick pullback slaughtered your position. Not a great situation.
The conditions of the underlying should dictate your strategy.
If you had a loser, consider if you used the wrong one at that point for that stock.
Just a few questions to consider as you plan your trades.
We learn from our losses. As long as you gain knowledge and experience, losses are valuable. Just consider the lost money tuition in the school of trading.