How do you determine whether you’re trading well or poorly? “Well,” you might answer, “when I am trading well, I win. When I am trading poorly, I lose.” In a broad sense, that is true. Ultimately your goal in trading is to make money, and that requires winning trades. But winning trades does not necessarily mean you are trading well—and losing trades does not always mean you are trading poorly.
The problem starts when you begin overvaluing the outcomes of individual trades.
If it were possible to win 100% of the time, then it would make sense to gauge the success of your trades entirely on their outcomes. Since that is not possible, you have to accept that sometimes you are going to lose trades. That does not mean, however, that you are failing.
It is easy to feel that way, though. If you have ever gone on tilt after a particularly bad loss, you know exactly how it feels. This can happen when you lose a lot of money on one trade, or when you have a string of losses. Sometimes it can happen when you have a single, small loss, but you simply do not understand why you lost the trade. Anytime you feel like you are out of control, you can start to dwell on the outcome of your lost trade. If you let it get to you, you can start making bad decisions.
The same problem can happen when you are winning, believe it or not. You get so wrapped up in your wins that you fail to see how you achieved them. Maybe you broke your system rules and won a trade. Thinking that the end justifies the means, you decide to break your rules again. After all, winning means you are trading well, right? Sure, until you start losing again, which is inevitable the moment you start breaking your rules.
What is Wrong with Overvaluing Specific Wins and Losses?
Here are some of the reasons that your logic is faulty if you start overvaluing your individual wins and losses:
Your win percentage is not everything.
Yes, it is a great stat to work on, and you want to get it as high as you can, all things being equal—but it is not the only stat that matters. Some traders make more money with a lower win percentage. How does that happen? These traders may have significantly larger wins and significantly smaller losses. They may also be taking more trades than another trader who has a higher win percentage. Both or either may result in making more money over time than the trader with that higher win percentage.
If these traders were to fixate on every loss, they would feel like they were trading badly when they are actually trading quite successfully. Remember, your results over time are what matter most, not your result in the moment. Even the worst trader on the planet can have a great result in the moment, and even the best trader in the world can suffer the occasional devastating or incomprehensible loss.
Your actual win percentage may not be that high.
Because of the way that binary trading is set up, where you only get around a 70-80% payout on your winning trades, you do need to win significantly more than half of your trades in order to stay profitable. You typically get 10% back when you lose, but notice how there is a gap between the payout percentage and the out-of-money refund, and that gap is in favor of your broker, not you.
Still, that does not mean you are going to be winning 95% of your binary options trades, nor do you need to! Say you are winning 80% of your trades. That is a pretty good win percentage. That still means you will lose two out of every 10 trades you take. Some months you may lose fewer, and other months, you may lose more. But you are not going to get far as a trader if you panic at every loss. After all, you are guaranteed to lose on a regular basis. You need to toughen up your skin if you want to keep trading right. You cannot afford to go on tilt at predictable, expected losses.
Flukes happen.
It is a mistake to think that your trading decisions exist in some kind of vacuum, and you and you alone are responsible for the outcome of every trade. Flukes are a part of life, and even though you can create a relatively predictable system with reasonably consistent outcomes, no system is fluke-proof.
There are going to be days when you lose your trades because of surprise events that nobody, including you, could have foreseen. Sometimes those flukes are identifiable; other times you may never figure out why you lost the trade.
The point here is that you did not necessarily make a mistake. If you did, then by all means, you should fixate on that loss and figure out how you can avoid it in the future. But if you did not make a mistake, you should not suddenly assume your system is broken and you need to go back to the drawing board. The whole point is that you did nothing wrong.
Sometimes flukes are responsible for why we win trades too. Maybe you did do something wrong and you won a trade anyway. Maybe you took a total blind gamble, won big, and now you are feeling like that proves that you have incredible gut instincts, ones you can rely on in the future. But once again, this would have nothing whatsoever to do with you. This would be a trade you won through pure coincidence. That is not an experience you can repeat time and again. You cannot catch lightning in a bottle over and over.
What is the Danger in Overvaluing Specific Wins and Losses?
When you hone in too much on individual data points, you miss the bigger picture in your analysis of your trading. Interestingly enough, this is a lesson you should have learned from the actual process of trading! Whether you trade through price action, technical analysis, or fundamental analysis, you know that you need to have some conceptualization of the bigger picture in order to understand how the specific bars you are looking at fit in. You cannot really interpret what they mean unless you are aware of the context.
The same goes for analyzing your own trade results! If you do not have a broad picture of your performance, you cannot interpret what an individual win or loss might mean or not mean.
What is really dangerous about hyper-focusing on individual results is this:
If you won a trade by coincidence, and not because you made a smart decision, you may think that whatever you did is working, and you should do it again. But if it was just a fluke and you start incorporating it into your future trades, you will have made a random modification to your system.
This will make your trading method less effective over time, and you will probably lose a lot of trades unnecessarily. Odds are good it will take you some time to realize what is going on and pinpointed when it started. Once you do, you may still have a hard time getting your system back in working order.
If you lost a trade by coincidence, and not because you made a bad trading decision, you may think that your system is broken when it is actually working just fine. This may prompt you to try to make adjustments to your system to fix the nonexistent problem. Doing so will introduce randomness and will actually create the chaos you are trying to eliminate. It will distract you by leading you on a wild chase for unreachable perfection. Along the way, you will lose more and more trades—throwing away a good working system in the process.
What Can You Do About It?
You know how there are fast and slow moving averages, and how faster-moving averages react quickly to changes in the market, and slower-moving averages less dramatically, creating a smoother line? And you know how you often need both on your chart to really get a feel for what is going on?
It is like that when it comes to analyzing your trading results. There are times when you need to be like the fast moving average, reacting quickly to changes. This is the case when you made an identifiable mistake, and you need to avoid it going forward.
Other times, though, you need to be more like the slow-moving average. You do not want to be too reactive to individual wins and losses. Instead, you should gather more data, just like the average, and then look at the broader trend. If you are noticing a lot more losses than usual, then yes, you need to back off from trading and take a look at what is going wrong. You may need to modify your system.
If you do decide that you need to make alterations to how you trade, it should never be a snap decision. It is something you need to think your way through. Once you do, you need to run tests, not just start switching things up as you trade live. Go back to demo mode and systematically tackle the problem, troubleshooting one aspect at a time. When you start noticing consistently better results, you are ready to go back to trading live!