Mistakes . . . Don’t Fear Them, Learn From Them

We all make mistakes. When it comes to trading and investing, mistakes come with the territory. But, if you are willing, those mistakes can be your best teacher.

The problem is that most of us were taught at an early age that mistakes are bad. Most of this comes from teachers and our educational system. But it also comes from parents, spouses, siblings, friends, etc. If you made a mistake, you can bet someone had something negative to say about it. In my case, it was even worse. Not only was making a mistake cause for scorn, it was also an unforgivable sin . . . the reason why I should give up whatever I couldn’t do perfectly. The reason why I should never have made an attempt in the first place.

Generations of kids have been indoctrinated with this fear of mistakes. Understandably, we try to avoid reliving them, avoid thinking about them, hide them as best we can to avoid ridicule and humiliation. Is it any wonder then that we, as humans, are afraid to make mistakes?

When it comes to trading, however, mistakes can be your best friend. If you ignore your trading mistakes, and I did this for years, you cannot use them to help you become a better trader. Reviewing all of your trades, the good and the bad, the winners and the losers, serves to make you a better trader.

To analyze your mistakes, create a written trading plan, a trading journal and an outline of your buy and sell rules. After the trade is over go back and look to see how everything played out. See if the actual trade you placed aligned with your trading plan and rules. Many times the mistakes are easy to spot: you did not buy at the right time and the stock turned on you; you ignored your mental stop and your loss grew to the point you have become an involuntary investor. Your rules require you to buy companies with a certain minimum earnings growth rate, but you decided to ignore that rule and buy a company that’s losing money. The list of mistakes you can make goes on and on. You can even analyze what you didn’t do in addition to what you did do as a way to learn.

By analyzing the actions I wrote about in my journal entry, I found the possible reason for why I was not pulling the trigger on good trade setups. I failed to follow my trading rules on a couple of recent trades and became afraid to act. Armed with this knowledge, I can act to correct this problem because I have actually identified the issue. Had I not analyzed my actions, I would have a harder time seeing what I was doing wrong and therefore a harder time correcting the problem. This process allows me to make course corrections quickly and get on with making money. Maybe you should too.