How to Learn from Your Trading Losses

March 11, 2024 Joanna Payne
Doing a post-mortem on your trades can help you better understand where things went wrong.

When you've made some losing trades, the urge to cut your losses and move on can be strong. Why focus on the past when new opportunities could be waiting? But spending some time studying your losers can teach you a lot about why some trades worked and some failed. 

Here are some diagnostics you could consider running periodically to see what you can find.

Win/loss ratios

Start by compiling some basic gain and loss statistics, including your numbers of profitable and unprofitable trades, as well as your average gain or loss for each. You can use them to create a simple ratio like this:

Image of an equation showing the number of profitable trades over the number of unprofitable trades, times the average gain over the average loss, equals total gains over total losses.

For example, let's say you had 17 profitable trades with an average $150 gain per trade and eight unprofitable trades with an average $225 loss per trade:

Image shows an equation: 17 over 8 times $150 over $255 equals $2,550 over $1,800.

If you looked just at your total gains and losses, you might think you'd been doing pretty well: You've got $750 in net profit, and 17 of your 25 trades were profitable.

However, you can also see that your average loss of $225 was 1.5 times bigger than your average gain of $150. What's going on here?

Putting these numbers side-by-side gives you an opportunity to review how you're managing and exiting from your positions. For your winners, could it be that you're taking profit too soon? If so, you could consider looking at what factors are influencing your exit decisions.

And with your losers, is there any chance you're holding on too long in the hope of a recovery? Of course, there are also times when the market suddenly moves against otherwise reasonable positions. But if there are several such reversals, you could take a look at how long you allowed the positions to fall before you acted.

Questions like these underscore the need to draw up—and adhere to—a trade plan before entering a position. If you've already pre-committed to some risk parameters and an exit strategy, you might be less likely to jump out of a winning position too soon, or stick with a losing one too long.

In terms of next steps you could consider trying to exit future losing positions before they reached your average loss. Indeed, you can be wrong more than you're right and still come out ahead—so long as you keep your average loss to a minimum.

Trade expectancy

It's also good to know if you're improving as a trader. Again, this goes beyond your net profit. So, how do you do measure yourself against yourself?

One way is to use trade expectancy, which is the average dollar amount one might expect to gain or lose per trade based on previous performance. 

To calculate this, you multiply your percentage of profitable trades by your average gain per trade, then subtract your percentage of losing trades multiplied by your average loss per trade:

Image shows an equation: (Percent winning trades times average gain) minus (percent losing trades times average loss) equals expectancy.

For example, let's say 40% of your trades in the past six months were profitable, with an average gain of $500 per trade, while 60% of your trades were unprofitable, with an average loss per trade of $250.

Image shows an equation: (40% x $500 = 200) minus (60% x $250 = $150) equals $50.

Now, of course, you can't predict future performance, but given these numbers, you could set a personal benchmark of an average gain of $50 per trade.

Then, you should aim to improve upon it with each trade. If the opposite is happening, it's time to revisit your strategy to see where the breakdowns might be occurring.

Patterns by type of trade

Finally, it can be helpful to organize trades by category. Here are some examples one could use:

  • Fundamental versus technical analysis techniques
  • Investment types
  • Order types
  • Time frames
  • Trade size

Then you can look for patterns. Do you find less success with longer-term trades, for example? Or when you choose exchange-traded funds versus stocks? Breaking down your positions in this way can help identify which strategies have worked recently and which you may want to improve upon—or avoid altogether.

Taking control

Examining your trading performance on a regular basis can help you better understand any behavior or other factors that may be influencing your outcomes. Paying particular attention to losses is a great way to identify shortcomings.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

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