An old saying goes “you’re only as good as your last trade”. There have been other variations on the theme, for example:
- you’re only as good as your latest success
- you’re only as good as your latest picture
- etc.
Unfortunately this kind of ruthless reasoning can seriously impact your mindset and your trading. It’s no different than recency bias, where your focus is centered on your most recent trading decisions, disregarding your longer term track record and the fact that you still have N-trades to make, over your lifetime.
You are not just as good as your last trade. You can be better…or you can be worse. It all depends on the decision-making process that you follow, and if you followed it in your most recent trade.
What Represents Bad Trading
To be fair, there is a way to evaluate your last trade…but it is the same way you can evaluate any trade, anywhere, any time:
- did you follow your time-tested plan?
This is the only relevant question, and there can be shades of grey in the answer:
- no, I did not follow the plan because I don’t have a plan;
- no, I did not follow the plan because I was influenced by something;
- no, I did not follow the plan completely because there was a logical reason for the slight variation which made sense based on my experience;
- yes, I followed the plan because it was a bread & butter setup.
Being able to offer the correct reply has much to do with self-reflection, being honest with yourself, and being disciplined. At the most basic level, a bad trade happens when you don’t follow the rules. The outcome of the trade doesn’t matter. What matters is that for some reason you did not follow your rules.
Most people would try to evaluate a trade based on it’s outcome – but in reality that’s using hindsight to justify your actions. In an uncertain environment, with many unknown unknowns, you can only have faith in a time-tested process. Your last trade is either a reflection of this, or it’s not.
So, if you made a mistake and broke your rules, then yes your last trade should teach you something. You should look at it and say “what made me behave poorly?”.
The Negative Effects Of Recency Bias
Recency bias is all around us. Just look at the newspaper headlines during each serious market downturn:
Source: SummitStrategiesGroup
And we all know what happend next:
This is an extreme example to make a point. In your own trading, you are influenced by recency bias whenever:
- you get overconfident due to a string of winners. I actually get more cautious the longer the winning streak, which is the opposite of what most retail traders do (augment their risk per trade, think they have a fail-safe system, overtrade, etc.);
- you get discouraged by a string of losses. The only thing that matters when I take a loss is whether I followed the plan or not.
So here are some suggestions on how to detach yourself from the outcome of any given trade:
- Remember that each trade is, in reality, a random event. Your trading edge will reveal itself over a large number of trades.
- Let your long-term track record speak. It’s more difficult to have confidence in your trading model if you have just started out of course – but then again you should be on a demo account and in the forex system development workshop or in a coaching session in order to create a consistent trading model.
- Stick to your guns. Follow the plan. If you have a ranking method that offers you “A-quality” and “B-quality” trades, perhaps only stick to the A-quality.
- Take a break from trading. If all else fails, remove yourself from the market and make sure you have other aspects of your life which are rewarding. You absolutely cannot let your trading results condition your mood.
Over to You
Even experienced traders are not immune to bad trades and recency bias. I made a bad news trade recently, where I simply did not follow my own rules. It was a dumb, emotional mistake. Does it matter, in the grand scheme of things? Nope:
- Fortunately it was the only mistake of this kind that I have made in the past 12 months or so.
- I am comforted by my longer term track record.
- I know exactly what happened and why I made the mistake.
So when you realize you made a mistake, follow my lead. We all make mistakes sooner or later, but trading is about consistency and longevity. It’s a marathon and not a sprint.
In the Book of Psalms it is written “weeping may endure for a night, but joy cometh in the morning“. Losses are never pleasurable but we need to remember that it’s just one single negative event. It cannot stop you from achieving success in your trading.
Don’t just be “as good” as your last trade – be better than you last trade!
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.