Education

Trading Strategy: Good Trading and Bad Trading

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When it comes to trading, it is inevitable to judge each of our trades as good or bad. It is a natural human tendency to subjectively classify everything that happens around us, and trading is no exception.

But it is also very common to end up falling into the error of reducing this classification to only considering trades that end with a profit as being “good trades”, and “bad trades” as those that result in a net loss. And of course, nothing can be further from the truth.

A good trade does not necessarily have to be result in a gain. On the other hand, a bad trade does not necessarily mean that you have lost money either. In order to categorize a trade, we have to look only and exclusively at its execution, and not at the outcome.

The result is important to be sure, but we should never look at a single isolated trade without context. Plus more importantly, we need to look at a significant volume of trades. Actually, what I want is to make money in a set of 100 trades, not to make money with 1 trade. Making money in 1 trade is relatively simple. 100 trades? Not so much.

To make money after 100 trades, what really matters is consistency in execution. To make money in an trade, there are many factors that can come into play, among them, why not say it, also luck. So as our goal must be to become long-term winning traders, we can not evaluate trades by their individual outcomes.

So what is a good trade?

A trade is good if it has been made in accordance with our trading plan. The trading plan is a document in which you specify all the details of your trading: schedules, products, platform(s) you use, broker, the orders you will enter, stop loss you will use, etc…One of the most important things that the trading plan contains of is precisely the conditions in which you will make the trades.

For example, your trading plan can specify that you will enter into trades where the price movement has broken a relevant resistance or support on a 15-minute chart with a relevant volume accompaniment.

If you make a trade according to your trading strategy and the net result on that occasion is negative, the trade is still good because it responds exactly to your trading plan.  And you know that statistically, the percentage of trades that end up being positive give you a positive mathematical advantage and that you will come out ahead in the long run. If not, you need to re-evaluate your trading plan as soon as possible.

What really matters is that in the long run, you trade according to your own rules, and all trades that meet these conditions will be good, regardless of the outcome.

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