What Is a Good and Bad Trade?

Many traders tend to classify their trades based solely on the outcome. If a trade is profitable, it's a good trade. If it results in a loss, it's labelled as a bad trade. However, this way of thinking is flawed and doesn't reflect the reality of trading. 

A better way to think about your trades is to focus on the quality of your decisions rather than the outcome.

Trading is full of uncertainty. No matter how much preparation or analysis goes into a trade, there are always factors beyond your control that can influence the result. This is why you should shift from focusing on the result to the process. 

The quality of the decision-making process behind the trade should be the measure of whether a trade was "good" or "bad."

The Problem of Resulting

Linking the quality of a trade to its outcome is a cognitive bias known as resulting. Resulting occurs when we judge the quality of a decision based purely on the result, without considering the factors that led to the outcome.

For example, a trader might say:

• "If the trade is profitable, then it was a good trade."
• "If the trade results in a loss, then it was a bad trade."

While this may seem like common sense, it oversimplifies trading. Markets are driven by countless variables, many of which are unpredictable. A single trade’s success or failure could be influenced by sudden news, economic data, or other market forces beyond your control. In short, sometimes being lucky, or being unlucky, plays a larger role than skill.

When traders fall into the trap of resulting, they fail to consider that even well planned trades can sometimes result in losses, just as badly executed trades can occasionally result in gains. 

The Correct Way to Judge a Trade

Instead of evaluating trades by their outcomes, it’s more accurate to assess them based on the quality of the decisions that led to the trade, and during trade management. Here’s a more helpful way to think about it:

• If you made well-informed, logical decisions based on sound analysis that followed your system, then it was a good trade, regardless of the result.
• If you made impulsive or emotional decisions, or didn’t stick to your trading system, it was a bad trade, even if it turned out profitable.

Good trades can result in losses, and bad trades can sometimes result in profits. What matters most is how you arrive at your decisions, because in the long run, it’s consistently following your system that will lead to, and keep you profitable.