One of the most common questions I have been asked over the years at the website is what really defines a good trade in this business? The common myth and perception by some traders is that a good trade relates to a trade that makes money, when in reality that is not essentially always true. Let me explain why..
First point I want to make clear, right from the beginning of this topic and question is that there certainly are different ways of trading, some methods of trading not being profitable or not tested for long term profitability while others methods are highly effective. What I am referring to here with this topic is I am referring to those that are following a high probability method of trading the markets that has been tested extensively in back testing, demo and also live.
Once a trader is following one of these important trading processes, then it is all about following that process and discipline.
Let’s Now Define: What is Good Trade in Forex?
A good trade in Forex is a trade that follows your trading plan, the trading plan that one knows produces a profit long term.
That is the quick answer to this one. Let’s dig a little deeper now shall we? A good trade is also a trade that one manages according to his or her trading plan exactly, does not close the trade early, applies the risk level suitable for the method and allows for some losses in the process.
What this essentially means is that a losing trade can also be a good trade if taken in accordance with your trading plan. In fact there is no such thing as a bad trade, other than a trade that goes against your trading plan or management plan.
This brings me back to the importance in trading overall of using a good effective trading plan and strategy to filter out your trades and sticking to a high probability process that you know and can see will work in the market long term.
In a way, the trading process itself is key with this topic.
Let me give an Example:
Say you took hypothetically 5 Trades following your trading plan and results were as below:
- First trade was a gain of a 2 to 1 ( A profit gain of two times the risk )
- Second trade gave a loss
- Third trade was a gain of a 3 to 1 ( A profit gain of three times the risk )
- Fourth trade made no money ( break-even or similar – not a loss, but not a gain either )
- Fifth trade made just over a 1 to 1 as a gain and then remaining position closed at break-even or stop loss, so not a loss, but instead a small gain.
Now looking at the above examples, trade 2 is an example of a trade that does not feel good to a trader and the reason being is that trading is emotional and losses in general hurt. I fully understand.
This aspect while not feeling good is unfortunately a part of the process.
It is also relating to the saying ‘cut your losses early and let your winners run’. While they hurt and no one wants them, they happen sometimes and are a part of any good trading process.
Now if we switch this around to focusing only on 1, 3 and 5 as trade examples which all made profit, then it makes us a traders feel good about ourselves and our process.
This in a sense makes many traders call these ones good trades as they feel good or in the instance of 2 and 4 calling them bad as no one wants to lose money or make no money on a trade. That is where emotional responses get the better of the trader because if one is looking at all 5 trade examples together they make up a good trading process.
So overall, what does this topic come back to?
This topic comes back to understanding Psychology and how you think as a human being. What often feels good is good and what often feels bad is bad, but in trading it does not work in that same way. What should feel good to a trader is following a good trading plan long term ( a profitable trading plan ) and what should feel bad to a trader is going against that plan making that trading plan unprofitable.
So overall, it essentially comes back to the important point once again as highlighted in the beginning of this topic, that what defines a good trade is not so much a single winning trade, but instead a trade that follows your trading plan and a profitable process long term..