I know, “Are Losing Trades Still Winners?” sounds like a crazy question, right? Read on and you may just find that it’s not really an irrational thought once it’s put into perspective.
I’m sure you’re still muttering to yourself, “a loser is a loser and that’s that;” this statement isn’t only incorrect, but it’s one of the worst things you can do to sabotage your day trading career.
Let’s face the facts here: It’s easy to blame the market and commiserate with other traders, but it’s a lot harder to think for yourself and look for the silver lining after a bad trade.
Alright, before I show you the “light at the end of the tunnel,” we need to create a fictitious system so I can logically demonstrate my point. I want you to bear with me here— it may seem a little ridiculous, but trust me, there’s a solid point I’m going to make. Let’s list some trading rules to start:
1. You can only trade between the hours of 8:30 a.m. CT and 11:30 a.m. CT (Central Time)
2. You can only trade with the current trend of the market (up or down)
3. You must base your entries and exits using only support and resistance
4. You must have had a good night’s rest (no trading on 4 hours of sleep)
5. You must be drinking a Diet Coke while trading (just to be ridiculous)
I know, it’s a little silly, but what can I say? I like Diet Coke.
For this example, we’ll use an unrealistic stop for the Nasdaq (NQ) of 10 ticks for our entry and, just like in the 5th grade, we’ll use an A - F grading scale to score how well you adhered to your trading rules. Check out the chart below:
Looks like we have a winner! You followed the rules by only trading during the established hours, you entered using support, you took the trade (long) in the direction of the current trend, and you rode your trade to the next level of resistance, as planned (all while sipping your Diet Coke)!
We’re good, right?
Wrong: you broke a rule! By “widening” your stop, you violated one of your day trading rules; does this send you to the corner with a funny hat like it did in Mrs. Smith’s science class?
No, but it’ll only get you a B, as you did violate a rule.
Let me show you how to make mom and dad proud by getting an A, even with a losing trade. Check out the following chart and I think my point will become clearer:
This is a case where instead of beating your head on the desk, you should give yourself an A+!
“But Jason, it’s a loser…”
You’re right, it is; but more important is the fact that you adhered closely to the day trading rules you’ve created for yourself.
Go ahead and hang this trade on the fridge, mom and dad will be so proud! Yes, this is a losing trade (there will be losses, sorry), but you stuck to your guns and you've even created an opportunity to learn from your loss.
I’ll be honest here, a 10-tick stop on the NQ with as much volatility as there is these days isn’t only too tight, it’s not realistic.
Do some back-testing and you may find that the initial break of your rules (adjusting to 30 ticks) may be what you need to set your stops at to weather the volatility and stay in the trade. If this is true, then make it a rule and stick with it.
I wanted to write this article for a few reasons.
For starters, I want you to know how important trading rules are and how important it is to stick to them. I mean, what if you widened the stop to, say, 100 ticks and got stopped out?! You’d be mad at yourself!
Another reason is that you can take a bad trade where you did stick to your rules and learn something from it. Who knows? Maybe you can even improve your day trading strategy.
Last but not least, your rules can help keep you on track. What if you did do the back-testing I suggested and you discovered that, more often than not, “that” particular rule held true?
If that’s the case, why change it?
After all, in futures trading, you’ll have some losses— it’s just part of the business. And remember: Don’t beat yourself up if you have a bad trade. If you stick to your rules, you’ve made the best decision you can. Give yourself an A!
Stay cool, drink a Diet Coke (or Sprite), and trade well.