The psychology of trading · Chapter 6 of 9

Judging a trade you lost

Q: Which of the four outcome/decision combinations is most expensive over time?

Bad decision, win — A bad decision that wins reinforces itself and triggers no review — you learn to repeat it. A bad decision that loses at least teaches the correct lesson.

Q: You followed your plan exactly and the trade lost. What is the correct entry in your review?

Rule followed; outcome negative — no change required — Treating every loss as a mistake creates the sense of a debt to settle, which is a direct cause of revenge trading. A loss by the rules is part of the method working as designed.

Foundation3 min read · part of The psychology of trading

The most valuable habit in trading is also the least natural: judging a trade by whether you followed your process, not by whether it made money. Outcome and decision quality are different things, and in a domain with this much randomness they come apart constantly.

There are four combinations and only two are what they look like. A good decision that wins, and a bad decision that loses, both teach the right lesson by accident. The dangerous two are the others. A good decision that loses feels like a mistake and tempts you to change a method that is fine. A bad decision that wins feels like skill and quietly teaches you to do it again — this is the more expensive of the two, because nothing about it prompts review.

That is why grading has to happen on the process. Did the setup match your rules? Was the stop where the method says? Was the size right? Was it taken because the conditions were there, or because you were bored, or behind? Those questions have answers that do not depend on the outcome.

This is also what makes a journal worth keeping. If the record only holds profit and loss, the only pattern you can find is which trades made money — and over a small sample that is mostly noise. If it holds the decision, you can find out which of your own behaviours cost you, which is the only thing you can actually change.

A practical rule that costs nothing: after each trade, mark separately whether you followed the plan and whether it made money. Over a few months the interesting cases are the disagreements, and they are the ones nobody looks at.

What to take away

Decision quality and outcome are different things and often disagree.
The dangerous cases are the good decision that lost and the bad decision that won.
A bad decision that wins is the more expensive, because nothing prompts you to review it.
Record whether you followed the plan separately from whether it profited.

This chapter, measured against your own trades

In the app the same chapter ends in your figures rather than an example: how often you did the thing it describes, over your last ninety days. You pick one change to make, and Evidence checks afterwards whether it actually changed — from your journal, arithmetic, no opinion involved. Questions you get wrong come back a week later and again a month after that.

Open the free plan →

Check that it stuck

Answers shown — in the app these are asked before you see them, and the ones you get wrong come back after a week.

Which of the four outcome/decision combinations is most expensive over time?

Bad decision, win — A bad decision that wins reinforces itself and triggers no review — you learn to repeat it. A bad decision that loses at least teaches the correct lesson.

Why is grading on process rather than profit the more useful habit?

Process questions have answers that do not depend on the outcome, and behaviour is what you can change — The purpose is finding what you can act on. Outcome over a small sample is mostly noise; your own behaviour is both measurable and changeable.

You followed your plan exactly and the trade lost. What is the correct entry in your review?

Rule followed; outcome negative — no change required — Treating every loss as a mistake creates the sense of a debt to settle, which is a direct cause of revenge trading. A loss by the rules is part of the method working as designed.

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