How to Use Root Cause Analysis to Improve Your Trades

by Trading 101     Jul 16, 2019

No trading strategy is successful 100% of the time. This is true in stock trading, as well as within the arena of Forex trading. While you can take safeguards to protect yourself against the possibility of your trades going bad, you will sometimes run into unique situations that will cause you to lose money, cause your Forex trading strategy to fall through, or cause you to not make as much as you initially anticipated on a trade. While these types of problems can be frustrating, especially to a beginning Forex trading hopeful, they can also be equally as valuable as a learning experience. Smart Forex trading experts know that when they run into unforeseen issues on the market, performing a root cause analysis can help them recover their strategy and better prepare for the next shift in the market, thus minimizing their losses and protecting themselves against a similar situation.

The phrase "root cause analysis" describes a systematic process that you can use to identify what has caused the issue that resulted in a faulty Forex trading misstep. The basic principle behind root cause analysis is the idea that dealing with a Forex trading or stock trading lapse is not enough to thoroughly safeguard your money and your investments. Instead, you need to spend time analyzing the layers that have lead to the problem to find the "root" from which the problem arises. Then, after you are able to identify the root cause of the problem, you can take steps to avoid falling into the same situation the next time you encounter a similar problem, trade, or indicator that lead to a failing last time.

To perform a root cause analysis, you will have to consider the factors that caused you to sell your currency or asset too early, too late, or to invest in a currency that did not show the growth that you anticipated. When these are singular incidents, the problem is generally not within the Forex trading strategy- though if the problem occurs more than once, it is worth it to reconsider the fundamental and technical indicators being used and search them for failings. Instead, think about the emotional and psychological indicators that lead to your faulty trade by continually asking yourself "why?"

Your problem may be emotional. Ask any veteran Forex trading expert and he or she will happily tell you that the smartest traders keep their emotions out of their trading strategy. Unfortunately, this is often much easier said than done. Analyzing the emotions that lead to a poorly thought out trade can help you avoid a similar mistake in the future. For example, ask yourself what emotion lead to your past poor decision. Were you caught under the spell of greed and deciding to wait out a price rise instead of selling at the pinnacle? Or perhaps you were gripped by fear, selling out your currency when your trading strategy indicated that the price would rise once again? Considering the underlying emotions of your trading can help you prepare a plan to counteract these feelings in the future.

Your problem may also be psychological. Consider the quirky baseball pitcher who has his pre-game ritual. There have been countless urban legends based around players who have had a bad game or even an entire bad season because a piece of their routine was missing. In the same way, make sure that you're in the right mindset when you start your trading for the day. The power of a positive attitude can never be underestimated.

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