April 22, 2008 at 6:24 am | | Comments 9

Good Trades vs. Good Results

What constitutes a “good trade?” Is it a profitable trade? Is it one that works quickly and provides you with a gain? Those are certainly nice!

But I’m not so sure that we can define our trades solely by our results. In fact, I’ll go ahead and say that a truly “good trade” can be declared regardless of your results – so long as certain conditions apply.

I recently had this discussion with a member over at A trader had commented that he was concerned about a day trade he had just made. Although he closed the position for a profit, he said “(his) only concern was (his) stop loss was greater than his profit…the risk reward wasn’t there when the trade was all over.” He followed with the question, “was it still a good trade?”

Interesting topic, to say the least! Here’s the reply I offered:

“I’d say that if before the trade you saw a risk/reward which fit your preference, that it was still a good trade. We have to roll with the punches after we are in (a trade), and sometimes we make a gain which is less than what we originally planned for. I think the measure of a good trade is whether the risk/reward was there from the beginning.”

We’ve all faced this issue as traders. We enter a trade with a certain game plan, do our best to follow it along the way, but when conditions change and we adjust, sometimes we’re left with a smaller gain than what originally would have offset the risk we took in the very beginning.

Seeing every twist and turn before they happen isn’t a requirement for good trading (fortunately!), so we don’t have to attempt to. What we have to do is evaluate the situation as it unfolds, and make the necessary adjustments to our stop loss levels or price targets, managing the trade to the best of our ability.

It’s like a pilot after takeoff, he keeps navigating toward the goal but a safe landing is of utmost importance. If that means he chooses an alternate spot to set it down, so be it. Exiting a trade at a spot not originally planned is sometimes necessary, but that doesn’t mean our choice was flawed to take the trade initially.

It’s important to remember that if the risk/reward profile of the setup was appealing from the outset, then taking the trade was the right thing to do. That means regardless of if you get stopped out for a loss or if you realize a huge gain. Taking high-quality setups with proper risk-reward profiles is at the core of how we manage our risk as traders. If you’re doing that, then you’re making good trades regardless of the results.

When it comes to results, we all want good ones and it’s important to review them from time to time and make sure we’re on track (as I’ve discussed before), so I’m certainly not diminishing the importance of that aspect.

However, making good decisions with not only which trades we choose to enter, but also taking logical steps along the way to manage each trade accordingly is what keeps us trading with a level head. So long as that’s the case, you’re protecting your objectivity and therefore able to keep making good decisions.

Trade well out there!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

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  1. When I first started out I had huge problem with the psychological elements of this. I had read all about the mechanics of making a trade and it all made sense – you spot what you are looking for and you get into the trade understanding the size of your position, your exit criteria etc and it is all perfect as you enter. You make the trade and it loses you money, nothing much but it loses. Now the same stock turns round and once again the set-up is perfect, you enter the trade and once again you lose money. Then once again the set-up is right and you think ‘nah’ and look elsewhere for your next trade.
    I did this for a while before I read about the psychological effects of losers being larger than those of gains (which is why low hit rate/high return strategies are the hardest to trade effectively) From then on I started keeping a record of the trades I didn’t make and the reasons why. I looked back after a year and it became obvious I lost a huge amount by not being tough enough as there were some trades that bombed me out several times before flying off into a huge overall gain – in fact I still get the urge to kick myself when I see an Abercrombie and Fitch store after I figured out how much money I lost by not taking a trade on them in 2000 which was when I went through this process!
    So the point I am trying to make in my ponderous way, is that what you don’t do is just as important as what you actually do in trading, whether this is actually taking the trade or what you do during the trade, such as not letting a position run or not taking your losses.

  2. TSR, thanks for your comments here, you’ve shared some good ideas. I think it just boils down to not only following your own trading method, but keeping tabs on those “what if” trades that you consider along the way. That’s probably the best way to incorporate new strategies into one’s method. Good stuff!


  3. ā€œIā€™d say that if before the trade you saw a risk/reward which fit your preference, that it was still a good trade.ā€

    I couldn’t agree more. It’s amazing how some people only judge whether a trade is ‘good’ is by the result.

    As traders we know that not all trades can be profitable. Not all decisions are going to be winners. But when we make a trade that allows us to remain within our comfort zones (as you define it: r/r fits traders preference), it’s a good trade. If the position becomes uncomfortable, we exit the trade and move on.

    Even though I trade options and am not a day trader, you may be interested in my investment philosophy because it’s compatible with yours:

    I’ve posted a link back to this blog.

  4. Hey Mark,

    Thanks for sharing your comments here. I think you bring up a good point regarding when a trade becomes “uncomfortable.” My opinion on that is that at the very least the position should be reduced (aka, “sell down to the sleeping level”), or closed out as you described.

    Trade well this week!


Trackbacks: 5  |  Trackback URL

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