The 2 Reasons Why Your Last Trade Is the Most Important One

by Trading 101     Jul 16, 2019

You might have heard this before in a trading 101 course, but you’re only as good as your last trade. That might sound ominous or judgmental, but the last trade a trader made reveals a lot about them a both a trader as well as a person.

If the last trade a trader made is a loser and created a significantly higher loss than previous losing trades, then all the red flags are raised already. If it’s in the same range as previous losing trades, then good – it shows a certain discipline and level of preparation. The same idea is true for winning trades, but less strictly.

Winning trades should have some variety to them in how much profit was made in the relation to how risky the trade was. Should there be several super small wins and some rather significant ones, more red flags are raised.

Let’s examine this in the context of the profession.

1) Recent Trades Affect Your Thinking

Recency bias is a very real thing in trading and is something that needs to be actively prevented by traders. The reason why your last trade is the most important one is because it determines your mindset going into the next one. Whether your most recent trade was a winning trade or losing trade has exactly zero impact on whether the next trade will be a good one or not.

The self-control required to be a good trader means that the most important part of a trade was whether there was a plan in place and how well that was followed, regardless of whether it was a winning trade or losing trade. This is something plenty of traders seem to forget.

There is a winning streak and losing streak mentality, which are self-explanatory. The winning streak bias makes traders believe they’re “on a roll” and lends them false confidence and the next thing they know is that they’re placing riskier and riskier bets. It’s obvious how quickly this can go wrong.

The same goes for the losing streak mentality. The loss of confidence often leads to a trader taking on far lower risk that usual out of fear of losing more than they already have. This is a fast way to fall down a slippery slope as lower levels of risk make it harder to score winners, dragging more confidence down.

2) Recent Trades Should Improve Your Thinking

The ability to avoid trading bias comes from mindset and understanding of the profession. It’s hard for someone who just lost a dozen trades in a row to listen to another telling them that a bunch of losses don’t matter and that there’s always tomorrow – but it’s the truth.

Gambling and regular sports have a similar phenomenon called “tilt.” It’s easy to get tilted into losing more and more, that’s simply human nature and it happens to thousands of traders every day. Just as how a championship athlete needs to understand that losing one game doesn’t invalidate all their other achievements, a trader needs to understand that one trade simply doesn’t matter.

What matters are your results at the of a quarter or at the end of a year. Diligent risk management and having a proper trading strategy plus a plan of action for every single trade is the key to winning long-term. Statistically speaking, every trade is around 50% likely to be a win or a loss. Looking at one trade in the context of a year’s worth of trades is irrelevant.

Coming out on top after a bad trade is a matter of mindset. Coming out on top after a losing streak is a matter of discipline and mental fortitude. If you’re lacking them, train yourself to be better.

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