Poor traders ask what. Good traders ask how. Great traders ask why.
The scoreboard tells the whole story, doesn’t it? In trading, not exactly.
Boom-and-bust traders (the most common traders) are accustom to journaling their trading wins and losses, detailing the basics of every trade:
- What – Stock ticker
- When – Date of entry and exit
- Where – Price of entry, stop loss and eventual sale
- How – Type of setup under consideration (i.e. cup-with-handle, flat base, etc.)
To be honest, this level of detail is only half of what great traders consider. It doesn’t tell us anything about the reason for placing the trade or our trading mindset. It’s no wonder why most traders remain in frustrating patterns of equal wins to losses with little balance progress.
The reason is that we’re not asking why.
Why did you sell early? Why did you buy here? Why did you move your stop? Why didn’t you risk more? These questions aren’t so easy to answer. The reason is because they have nothing to do with the stock, and everything to do with you. And quite frankly, you’re a bit complicated.
But when you begin to ask why, you will come to understand your destructive (self-sabotaging) and profitable behavior patterns. And this, by far, is that fastest way to expedite your learning curve in trading.
Win or lose, you should play the detective in interviewing yourself as a witness. I spend at least 15 minutes per trade having the following conversation inside my head.
This is how this conversation went recently on my trade in FIVN:
Detective (Me): So why did you buy FIVN at $45.15 on January 14, 2019?
Me (also Me): It met my entry criteria, and was back-testing resistance on low volume.
Detective: OK, but you sold a few days later, is that right?
Detective: Why did you do that?
Me: Because I was no longer comfortable with the trade.
Detective: But you said it met all of your criteria?
Me: It did.
Detective: So why did you sell it so soon at $46.81 on January 17?
Me: I was afraid.
Detective: Afraid of what?
Me: The market. It was down that day, and people were expecting a pullback. Besides, I already had profit (3.6%).
Detective: So, you wanted to keep profit while you still had it?
Detective: Is selling because you are afraid part of your strategy?
Detective: If you didn’t sell, would it have hit your stop?
Detective: So, what ended up happening after you sold it?
Me: FIVN rose another 15% in two weeks.
This conversation is a bit embarrassing. I did some pretty impulsive and silly things. But this is information will be extremely useful for me later.
Here’s what I learned about myself:
- I interfered with the trade because I was worried about the market pulling-back, which is not even part of my sell strategy. There was a lot of negative opinions floating around, so I decided to cash out.
Next Time: Don’t let negative market sentiment cloud your decision-making.
- I had the correct stop in place, which tells me my setup was fine.
Next Time: Your initial stop price was calculated well. Continue calculating that way.
- I’m afraid of losing, which ironically creates a situation where I lose more (profit).
Next Time: Don’t interfere with the trade. It just creates more of what you don’t want.
Doing this sort of analysis for every trade you take will catapult you from “good trader” to “great trader” quicker than you can imagine. The final step here is to actually follow your insights once you have them.
Always ask yourself why. Internalize the why. The money will come much easier. Good luck!