Trading Psychology – The Truth About Trading Errors and Winning Trades

In sport and in trading, we often think that it is the ability to make the big winning shots and big, home-run trades that separate great athletes and traders from the rest of us. That is not really true.

A very interesting shot-by-shot analysis of the Basel 2010 Tennis Championship reveals much about how elite tennis is played and how elite trading can also be mastered.

Background: The tennis match was the final between Roger Federer and Novak Djokovic. Djokovic won this tournament last year and took Federer out of the US Open in the semifinals in September. Despite Djokovic’s psychological edge, Federer won this match, winning his 65th ATP title and breaking Pete Sampras record for most major title won.

You might be thinking that Federer must have made many spectacular winning shots, firing off winner after winner overwhelming his highly skilled opponent. Not so. Every shot was assessed and the match analysis revealed some surprising statistics (match analysis link below).

Important Findings: Two things jump out of this unique analysis. First, there were many unforced errors made throughout this match. An unforced error means a lost point due to a poorly hit ball that the player should have been able to return back to his opponent. In this important match, 40% of the points played ended because of an unforced error. The take away message is that even the very best players in the world make a lot of mistakes!

The second important finding of this analysis is that only 5% of all shots made were clean, winning shots that were untouched by the opponent. There were 709 shots made during the match and only 36 were clean service aces, returns, overhead smashes, ground stokes, or volleys. These untouchable winners accounted for about 20% of points won. In other words, 4 out of 5 points were won on longer rallies, unforced errors, and solid court-play. There were very few spectacular shots.

What It Means for Trading: For active traders, the take-away message is clear. Being a winning trader – even an elite performer – is not based on making huge, home-run trades. It’s about grinding out small wins day after day. Occasionally, we will get lucky and have a large winning trade, but this happens only rarely – only a small percentage of the time as in the low percentage of spectacular shots made in this tennis match. Being a competent trader is not based on making big wins; it’s about making small wins consistently.

The other take-home message is that errors are OK. We all want to be error-free, but being human, that’s just not possible. The key is to recognize when you have made an error and immediately cut the loss short, no matter what. Then, avoid trying to make it all back with a big winning trade. That’s another unforced error. Instead, focus on making the next small winning trade, and the next, and the next…