Introduction – Every Adversity Brings the Seed of Unborn Opportunity
You have probably heard it many times before: every failure and temporary defeat is an opportunity, whether it’s learning from setbacks in trading or other life endeavours. However, you can never be certain of this unless you have indeed failed numerous times and accumulated experience, thanks to those setbacks. To solidify this argument, let me use an analogy.
Let’s say you want to learn how to ride a two-wheel bicycle (I specify “two-wheel” because some people prefer to cycle with two additional supportive wheels). Now, what’s the best way to learn how to ride it? Presumably, by sitting on a bike and trying to ride it, right? Because no matter how many videos you watch or manuals you read about how to ride a bike, it will be impossible to learn unless you actually sit on one and start pedalling. While pedalling, you will likely fall off numerous times and struggle to maintain balance. However, by persisting and continuously working to find the right approach, you will eventually achieve initial success and be able to do basic riding. With further practice and the accumulation of experience, you will only get better and better at it.
The moral of the story: without the initial failures, you would never have succeeded in riding a bike.
Similarly, in the realm of trading financial markets, one of the best ways to learn is through failure. By facing setbacks in forms of streaks of losses, periods of indecision, psychological difficulties, technical discrepancies, we learn how to fill in the needed loopholes and construct a needed path towards consistent profitability within the market.
Two Types of Failure: Inevitable and Controllable
I’d like to emphasise that there are two types of failure within the realm of trading: inevitable and controllable. Inevitable failure is the kind that will happen regardless of what you do and serves as a valuable teacher. Controllable failure is similar to making mistakes; by taking the necessary actions, we can avoid making the same mistake twice. Either way, learning from failure in trading is a vital element that helps in further progression.
Below, we will delve deeper into these two types of failure.
Inevitable Failure
One example of inevitable failure is the bicycle analogy mentioned earlier. In trading, a similar experience is encountered during the first months of operating within the industry. No matter how many books you read or videos you watch, without actual implementation – where you will face unavoidable setbacks – the necessary skillset cannot be properly developed. From our own experience, below is a list of inevitable failures we went through to build a sort of ‘immunity’ for survival within the market:
1) Blowing the first trading account
How can you succeed if you’ve never experienced the loss of your initial investment capital? Blowing an account, among other vital elements, teaches an important lesson: the necessity of having a solid risk management plan.
2) Quitting initially, before returning to it again
“I will never do this again” was my initial reaction to the challenges presented by the market. Indeed, before making a permanent return, I quit trading for a few days at a time. This experience taught me to be resilient and to never give up.
3) Getting lost in the vast maze, trying to find a way out
What are these things? What should I be doing? Why did the price behave the way it did? These and other vital questions caused a mental storm, teaching the crucial lesson of defining what you want and creating a concrete plan to navigate through the complex world of financial markets.
4) Going through an unbreakable losing streak
Experiencing a losing streak taught the importance of remaining patient and disciplined, optimising the overall trading plan, and understanding the true nature of trading psychology.
5) Trading with fear and greed
We all begin our journey wanting to make a lot and lose nothing. However, over months and years, we realise this way of thinking is a mere utopia. We must learn to appreciate accumulated returns and understand the detrimental dangers of greed.
In other words, inevitable failure is the initial challenge one must endure before building the strength to continue fighting and eventually find an edge within the market.
Controllable Failure
The name of this particular form of failure might seem bizarre at first. You might wonder, “How can we control failure if it hits us unpredictably?” The thing is, oftentimes, we make mistakes by falling into the same trap repeatedly. This, in my book, can be controlled with rationality and constructivism. Hence, we label it as ‘controllable failure’.
Let me provide some examples. If you blow a trading account once, twice, or even three times, there is nothing to worry about. At the end of the day, we learn from these temporary defeats, implement the necessary changes, and come back stronger than before. However, if you continue blowing accounts multiple times consecutively, it indicates something is wrong, and corrective action should be taken. A primary contributor to damaging your trading capital could be a lack of proper risk management. As we always emphasise, if you risk no more than 1-2% of your total balance per transaction while adhering to your trading plan, the likelihood of damaging your account significantly is low. After all, trading is a game of numbers and probabilities. This means you have substantial control over what could be considered a failure, provided you have accumulated the necessary experience to maintain consistency in the market.
Another example relates to the psychological side of trading. Many traders fear losing. However, it is impossible to avoid losses in trading. Why? Because there are numerous external factors beyond our control. No matter how much confidence we have in our technical and fundamental analyses, it is impossible to avoid temporary setbacks entirely. Thus, we should embed the necessary principles into our subconscious minds and accept the market for what it is. The truth is, achieving a 100% win rate is impossible – and, frankly, unnecessary. By simply being right half of the time, we can still make a fortune in the market, thanks to the law of large numbers and effective risk management strategies. In summary, knowing how to lose is as important as knowing how to win. If we do not acknowledge this, we will struggle to remain consistently profitable over the long term.
There is a saying among traders: “Do not let a losing trade cost more than a winning one”. This implies that regardless of the outcome of any given trade, the long-term picture is all that matters. Therefore, by controlling the psychological aspects of trading along with the technical ones, you will see a significant improvement in your trading process.
A Concrete Plan for Avoiding Making Mistakes
We want to embrace temporary setbacks and to be learning from failure in trading, but at the same time, we want to avoid making mistakes when we can control them. Below is a set of rules that can help regulate mistakes through rationality and critical thinking:
1) Know when to sit on your hands and do nothing when opportunities are not present. This will help prevent overtrading and protect your trading capital.
2) Plan your trades beforehand, and execute them afterward. This approach will help eliminate FOMO (Fear of Missing Out), irrational decision-making, and rushing into trades.
3) Set your targets and let the price do its thing. By doing this, you will be less prone to greed, allowing the trade to play out according to your initial analysis.
4) Have a solid, set-in-stone risk management policy, and adhere to its rules. This approach will help eliminate fear and preserve your trading capital, ensuring you can withstand losses and continue trading.
5) Stop constantly monitoring charts and understand that trading is a game of probabilities, not certainties. Not every trade will be profitable. Constantly watching charts can lead to emotional attachment to trades, resulting in irrational, fearful, and biased decision-making.
Conclusions – Learning from Failure in Trading with no Fear
It’s all about perception. Some people see failure as an endpoint, where the only option is to give up. Others, however, use failure as a tool to identify weaknesses and improve significantly at what they do. As a matter of fact, learning from failure in trading is one of the best ways to advance your capabilities within the realm of financial markets.
Don’t be afraid of failure and temporary setbacks. If anything, they will make you more experienced. In trading, you will never succeed without falling down many times. In fact, it’s not about how you fall that matters. What truly counts is how you pick yourself back up and move forward – stronger and wiser each time.
