The markets can be a harsh teacher, but that’s only if you pay attention. Everyone takes losses, and every loss presents an opportunity to learn. If you are a new trader, a loss can be taken as an opportunity to assess your method or performance. If you are an experienced trader, a loss can serve as an opportunity to re-assess what you are doing.
In this 5 week series, we’ll present a few thoughts to consider after taking a loss in your trading. We cannot cover everything, but we’ll cover several important points that traders often miss or ignore.
This week is part 2 of 5. Let’s dive in.
Part 2 – Following your trading plan (and losing)
Every trading method will experience losing periods. The question is…are the losses within your pre-determined frame of statistical expectation, or do the losses exceed what you had anticipated?
Let’s suppose that you followed your trading plan to a tee, and you still ended up taking losses. What then? If the losses didn’t violate your pre-determined expectations, then you might not have much to worry about as you were expecting to endure a certain amount of losses. If you have the means to double-check this, then you should. For instance, some platforms have market-replay capabilities, such as our GLOBAL ZEN TRADER platform – REQUEST A DEMO. What would happen if you ran a simulated trade of the same live session that day? If the difference is minimal, then you can confirm your trading result. But if the difference is significant—most likely due to slippage—then you’ve got problems.
Slippage matters and it is something that doesn’t show up in a simulated environment. The reason for this is that simulated fills are not subject to real supply/demand conditions. If you find a large discrepancy between your live and simulated trading results due to slippage and fills, then you know that accurate performance stats must come from live trading (and if your method is based on hypothetical stats, then those stats can be unreliable).
So if you follow your trading plan and experience losses, you need to evaluate if the losses fall within the realm of pre-determined expectation. If they don’t, then your losses indicate that you may not have analyzed your trading method well enough - we will explore this topic next week.