There are basically four types of trades:

• Good Trades
• Bad Trades
• Winning Trades
• Losing Trades

Not all good trades win and not all bad trades lose.  It’s important to know the difference.  We’ve all placed bad trades that took profit.  How many times have you had a trade in that was obviously a mistake end up taking profit because of a news event or a market change-over anomaly?  Likewise, how many times have you placed a perfect trade, one of those one in a million opportunities with every type of confluence available, only to see it blow your stop loss in an illiquid market?

I’m going to ignore the difference between winning and losing trades.  You all know that difference pretty well.  I want to focus on the difference between a good trade and a bad trade.

Good trades are those trades that meet all of the criteria of your trading system.  It passes all of the filters, meets all of the positive criteria, and offers an attractive risk to reward ratio.  Taking these trades is a no-brainer.  Some of these trades will end up losing money.  If your system has a positive edge, the losses won’t matter.

Bad trades are those trades that you take and later (or even at the time of entering) realize that they do not meet your criteria, or that one or more of your filters was violated.  We’ve all done this from time to time.  Very few traders can tell me with a straight face that they’ve never tried to catch a falling knife or got impatient when waiting for a solid 1-2-3 to complete.  It happens.  Get over it.

The key to surviving the bad trades is to suck it up, take the hit, and exit the trade.  Don’t wait for break-even, and don’t even think about adding to your position.  Get out of the trade the second you realize that you’ve made a mistake.  Trust me.  I’ve seen this dozens of times.  A client, mentee, or good friend comes to me looking for advice.  The guy’s into a bad trade in a big way and it’s 1,000+ pips against him.  Every time it looks like a turn-around, the guy added to the position.  The problem with this scenario is that the turn-around is usually imagined.

The key to entering good trades is simple.  Follow your rules 100%, only trade a system with a positive edge and enter every trade that meets the criteria and fits the filters.  Once you are in these trades, you stay in them until your trade meets the system’s guidelines for an exit.

Knowing the difference between good and bad trades is a key skill to master for any trader.  Your actions in both of these trading situations will determine yuour success as a trader.