A rule-breaking trade that made money and a by-the-book trade that lost. Why the second was the good one, and the four questions to grade every trade before you look at P&L. This free lesson covers: Same market, two decisions, Which was the better decision?, A result is decision plus luck, Name it, A winning mistake teaches the wrong lesson, What one bad trade costs, Grade the process first, Grade this one, Make the grade part of the record, Put it together.
Measuring Your Edge · Learn · about 3 min
Trade one had no stop, three times normal size, and chased a candle that had already run. It went your way: +$200.
Trade two was your setup, 1% risk, the stop where the idea is proven wrong. It got stopped out: −$100. Most traders would call trade one the good trade.
Going deeper
"Resulting" is poker slang for judging a decision by its outcome. Annie Duke made it widely known in Thinking in Bets (2018). The research term is outcome bias: people rate the same decision as better when it happened to turn out well (Baron and Hershey, 1988).
The dollar amounts in this lesson are an illustration. The arithmetic is general: with fixed fractional risk, one loss at several times normal size costs several normal winners, and a trade without a stop has no defined maximum loss at all.
Only if it holds up over a large sample of trades, tested the same way you tested the original rule. A few lucky wins are not a sample, and they are the most common reason traders drop rules that were protecting them.
Yes, if the plan has a positive expectancy over a large sample. Losses are the cost of taking valid trades. The plan is judged by its results over many trades, not by any one of them.