Oops! Gaining an Edge from Errors and Mistakes

Several months ago Inc Magazine ran an article on the ‘Rules of Success’ wherein several entrepreneurs shared their beliefs about key factors instrumental to their own. Have you identified your ‘rules for success?’ Do you have a rule for when you make a mistake?

One rule I found extremely interesting was contributed by Arianna Huffington, co-founder of the Huffington Post, on failure:

“My mother used to call failure a stepping stone to success, as opposed to the opposite of success. When you frame failure that way, it changes dramatically what you’re willing to do, how you’re willing to invent, and the risks you’ll take”.

As traders, errors and mistakes can be costly, very costly, and in turn, can undermine our self-confidence. If left to continue spiraling downward unchecked, it could potentially end our career as a trader. They (our mistakes) are important, very important and our perspective about them as well as how we deal with them can have a significant impact on our overall success.

In addition, many traders have an inherent fear of making an error or mistake due to the nature of trading based on the fact that each action is preceded by a decision and each decision is preceded by an observation, orientation, interpretation, evaluation and choice with each of these actions subject to an error or mistake. That statement is based on the universal fact that no trader ever realizes winning trades 100% of the time.

Consider the following in order to gain the most benefit from your errors and mistakes, and hopefully, make a difference in your trading results. I say this because in my own experience and my experience with countless others (business owners, professionals and traders), most choose to avoid examining their errors and mistakes due to the negative feelings generated through dissecting failures.

In attempting to gain the most from making errors and mistakes, let’s first define each so we can zero in on the type of ‘wrong’ since, in my opinion, they are different. My definition of each is as follows:

Errors: Physical in nature, i.e., doing something wrong based on a manual action, such as:

Clicking on the wrong price when placing an order in the market

Setting the wrong price scale on a chart

Using the wrong data set underlying a display object, etc..

Also, think about an ‘error’ in baseball; it is an act of a player who did (or did not do) something that resulted in consequences that allowed something to happen that should not have happened—missing an obvious catch, an errant throw, or a dropped ball.

Mistakes: Mental in nature, i.e., doing something that ends wrong based on faulty thinking, planning, interpreting, evaluating, choosing, deciding, etc.. For example:

Missing intraday excess as a potential reversal signal

Not giving credence to time-framing

Miscalculating or defining a key decision zone as to its importance

Reading too much or too little in a display or developing patter

Misinterpreting a volume display.

First, take time to understand your core beliefs about errors and mistakes.  Are they reflected in the way you currently think and feel about errors and mistakes? Are the beliefs positive or negative? Do your beliefs and actions regarding errors and mistakes include openness, growth, patience, inquiry, disruption, and embracing ambiguity to name a few.

Remember, to learn from our errors and mistakes we must possess core beliefs and a culture supportive of those beliefs. Tactical actions not derived from our beliefs and culture won’t cut it.

One last point, think about how diligent the NTSB is in dissecting an airplane crash in seeking to discover the root cause of the crash as a key to learning how to potentially prevent further crashes.

Second, “if you know what can go wrong – you can do something about it”. For example, in Daniel Coyle’s book, The Talent Code, a book which I have referenced numerous times as a book not only to be read, but also studied. The book discusses the value of increasing one’s awareness to identify an error or mistake in real-time, addressing the error or mistake in real-time, and then repeat the process using the ‘corrected approach’ until the ‘right way’ is the norm.

To do this we need to:

Give ourselves the freedom and permission to make errors and mistakes in the context of learning.

Recognize when an error or mistake is happening, acknowledge the fact we made an error or mistake and fully accept responsibility for it.

Use a defined process or checklist to thoroughly understand what happened as well as why it happened.

Explore and know the potential cost of not fixing it, allowing it to go unaddressed, or not correcting it.

Determine as thoroughly as possible all of the causes and/or potential causes as well as the type of the error or mistake, (NOTE: This step is essential in helping us minimize the possibility of repeating this type of error or mistake in the future).

Create processes and procedures to reduce the potential of repeating the error or mistake.

And, last but not least, accumulate those ‘lessons’ as key components in our overall process of developing our ‘cumulative experience’ database.

 “Progress without failure is an illusion.” ~Anonymous

Third, make sure the ‘fix’ we put in place really holds. To do this we need to use tools that simulate our mental and physical processes as realistically as possible. For example, according to information available on Edwin Link, he talked about how pilots were originally trained how to fly by one pilot passing on what he knew to a new pilot.

When Edwin himself learned to fly he began thinking that there had to be a better way to train pilots which resulted in his patented Link Trainer, a simulator that not only increased the efficiency and effectiveness of pilot training but reduced the risk for the new pilot by allowing him or her to make errors and mistakes on the ground versus in the air. Errors and mistakes that could potentially cost the pilot his or her life. To learn more about Edwin Link, the history of the Link Trainer, and its contribution to saving pilot’s lives, check out the various sources on the web beyond this one.

Fourth, gain a deeper understanding of the principle and concept of ‘deliberate practice’ from one of the original researchers on the subject, K. Anders Ericsson through his books The Cambridge Handbook of Expertise and Expert Performance and The Road to Excellence.

For example, one thing you might do to capitalize on this concept when used in the context that ‘we can control our trading risk but not our profit potential’ is implement a process such as this using the principle of ‘Adverse Excursion’ developed by John Sweeney and covered in his book, Campaign Trading.

“… the best way to analyze the problem of minimizing losses is to analyze the actual experience of losses taken in past trades.” -John Sweeney

Suggested exercise:

Complete of a minimum of 100 trades (simulated and real)

Log the results of each trade in detail as to (A) Entry price, (B) Protective Stop Placement Price, and (C) The extreme price of the negative move, i.e., the farthest price the market traveled away from your entry price based on your trading timeframe. “Maximum Adverse Excursion is the worst intraday price movement against a position measured from the point of entry.”-John Sweeney

Diligently analyze each trade using the replay feature in your software to learn if and how you could have improved your trade location by possibly using:

Resting orders versus market orders

Different displays or chart configurations

Methodology focused on minimizing risk

A more detailed approach to selecting a place to enter the market

Fifth, checkout how your software’s replay capability allows you to view markets in both real-time and replayed past dates simultaneously. This functionality provides several benefits such as:

An effective learning tool for traders new to trading

A skill enhancement tool for experienced traders

A multi-monitor capability for replaying a session including inter-market and disparate timeframes

The ability to replay a session simultaneously with your real-time displays. Two examples of the benefit of this functionality are:

For traders who take a lunch break and want to review the session including the market activity that occurred while they were on their break

For traders using certain methodologies who only trade specific setups and experience ‘waiting time’, they can use that time to enhance their interpretation skills as well as the enhance their proficiency in understanding the market’s auction process

 “When we change the way we look at things – The things we look at change.” -Leonardo da Vinci

Until next time . . .