Today's Quote: “Learning by experience often is painful- and the more it hurts, the more you learn.” Ralph Banks.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

“12 Trading Laws of Success” –

LAW #6: LEARN FROM THY LOSSES

The path that leads to market mastery is a journey fraught with countless perils. The danger, the loss, the trials and tribulations that an aspiring trader must endure, are enough to break the backs and crater the souls of most individuals who dare to trek its course. It is a shame that so many are quick to assume that an individual, who has mastered his craft and commands the markets with incredible acumen, has accidentally stumbled upon his gift by some innate tendency or natural endowment. This is far from the truth. Pain. Loss. Frustration. Confusion. Uncertainty. Inconsistency. These are but a few of the states and circumstances that provide the education necessary to reach the desired heights of greatness. Each trader who enjoys a certain level of success today is guaranteed to have suffered through the pain and agony of being a loser yesterday.

We, as human beings, simply do not learn from our successes, but rather from our failures and shortcomings. We, as adults, know that fire should not be touched because, at one time in our childhoods, we got burned. So it is with trading. We learn how to win only after we learn all the ways to lose. So my question to you is this. What are you doing with your market failures? Are they wasted, ignored, left to fester and grow more potent as time goes on? Or are they serving as valuable examples of what not to do in the future? Within our losses lies the secret to the success that we are looking for. We must lose first, then use those losses as a springboard to winning. Remember, we leap forward by great distances only after first stepping backward. In other words, we step back, then leap forward. That is the law of nature. That is the blueprint of success. And that, my friends, is the way to trading mastery. Without stepping back first, our attempt to leap forward will be feeble and weak. So do not moan and whine when you experience a losing trade. On the contrary, you should rejoice. For that loss, dealt with properly, is a wonderful angelic guide that has the potential to lead you to a winning future.

One of the most valuable tools available to a trader is not some fancy market indicator or some sexy trading technique, but a simple, yet effective diary of losing trades. I have found that keeping a log of all my losses makes it easier for me to spot trends and recurring mistakes and errors. For instance, after reviewing a string of five losses, one might discover that a late entry was made on four of them. That valuable discovery, if dealt with properly, holds the key to dramatically improving one's winning percentage. At that point the trader would focus his or her attention on entering sooner or refraining from chasing the desired stock too far. I recall making an interesting discovery years ago, after using my log to review all my losses made the prior year. After a careful review, I found that 78 percent of my losing trades were in stocks that cost between $8 and $15 per share. I remember that day like it was yesterday. It was an amazing discovery that I'm sure I would have missed without the use of my log. Clearly, that review revealed the simple fact that if I had stayed away from stocks in the lower-price ranges, my performance would have at least doubled. So many incredible things can be derived from a careful review of one's failures. A daily diary of these failures tells a lot about who, what, and where we are. Used with dates, it can also tell us where we are going, and if we are going anywhere at all. I wouldn't leave home without it. Heck, I wouldn't even be at home without it. My 5-yearold daughter learned how to walk by falling. Now she's running. This 33-year-old trader and author learned how to trade by first losing. Now I'm teaching traders all over the world how to win in the markets just like I do. Winning takes care of itself. Just learn the art of losing properly, and your dreams may just become your reality.