Traders and investors regularly make mistakes. This is not a problem on its own. As Albert Einstein once said, “Anyone who has never made a mistake has never tried anything new.” Sadly you see many private traders make the same mistakes time and again. And that is a shame, because mistakes offer chances to improve yourself. If you take those chances you will ‘automatically’ start making fewer mistakes.
The more you start thinking about it the stranger it seems. You trade the financial markets and want to do so as profitably as possible. In doing so, you make mistakes. They often hurt as there is often a lot at stake. You’d expect not to make the same mistakes. Due to the madness of the day you forget, or even ignore these mistakes. Sometimes we are even (unfairly so) rewarded for our bad behaviour. But to be successful, and stay successful it is crucial to learn from your mistakes. It means you have to change your behaviour.
We know it, but do not act accordingly.
Having learned through experience, many big investors and traders have made valuable statements which can be found everywhere. The one about cutting your losses and letting your winners run for instance. We know it, but don’t act accordingly.
Who hasn’t done it: Grabbing small profits and letting losers run. Hoping that it will go your way again. And when it all went wrong and you might even have lost an irresponsibly large amount of money, you decided you would never make the same mistake again. But when you were in the same situation you did the exact same thing. Because you pretended the circumstances were different? Or was it to make up for the last trade, the one which went very wrong?
In our past life as investors of shares and options we made many mistakes. We too let ourselves get carried away with the madness of the day. Acted on advice from analysts or others who were being paid to know it all (and to predict it). We bought too soon: out of impatience, or because of fear. We also stuck around for too long: out of greed, or revenge for the previous trades that went wrong. And who hasn’t diverted from their strategy? Because you saw a once in a life time opportunity, you could even touch it. Yes, our senses acquire unexpected powers when we want to bend reality to fit our needs. Suddenly it is our gut feeling that rules the day. Justifying, finding support, silence, forgetting…. Acknowledging mistakes is one thing, but correcting them is another, entirely different thing. Many people assume that they are done if they acknowledge their mistakes. But this is a fallacy which derives from the fact that it takes many people a lot of energy to admit their mistakes, especially if it isn’t the first time. They feel weak and ashamed. They find their refuge in justifying their actions, in finding support with others, silence or forgetting their actions… There are many ways to ease the pain of a mistake. But understand that desperate times call for desperate measures, and that an unattended small mistake becomes a big one. So: ‘Nip it in the bud’.
It starts with acknowledging the mistake. But only then does the real work start: showing changed behaviour. What helps to avoid past mistakes is turning it into a merit. If you make a mistake because of impatience then practice patience. Did you trade wrongly because of greed, place satisfaction opposite it. Be happy with the profits you have made and appreciate that you did not make a loss (this is something many traders and investors can’t say). By taking a different stance you can remove stubborn mistakes. The next step is to behave differently. Following this you have to ensure you keep this behaviour up, as old habits can easily crop up again.
This is how you can learn from your mistakes:
- Acknowledge your mistake and decide how to tackle it.
- Try to gain insight into the mistakes you make regularly and find the causes.
- Link your acknowledgement of mistakes to self-understanding (what does it say about me that I keep making the same mistake?)
- Reward yourself if you have stopped making the same mistakes.
From: The Power of Mindset Trading
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