While it is entirely possible that we did get unlucky, we can only safely say so if we did everything possible beforehand to achieve the desired outcome.

In terms of trading, this means that we entered into a position according to a well constructed trading plan with well defined risk management parameters. 

If this process is robust and tested through different market conditions, then adverse outcomes can truly be attributed to receiving a poor toss of the cosmic dice. There is after all, a line beyond which every trader relinquishes influence and control over the final outcome – the point is to do everything possible before crossing the rubicon. 

Should the process be flawed, or not followed properly, then a trader cannot fully blame negative outcomes on luck.

The problem with fully apportioning the blame for our failures to bad luck is that we are mentally absolving ourselves of responsibility for the poor outcome.

“It wasn’t my fault, no one could have foreseen this would happen.”

“It wasn’t my fault, I got unlucky.” 

The words “it wasn’t my fault” are very dangerous to traders (and people in general too). By saying “it wasn’t my fault”, an individual is mentally bypassing the need for introspection.

Often, this comes down to people wanting to avoid the unpleasant emotions that poor outcomes cause them to feel. It is a modern day defense mechanism, in the sense that it allows us to deflect blame and hence avoid the bad feelings that failure elicits.

Unfortunately, avoiding blame also means that the individual does little reflection on what possible mistakes were made. Ultimately, to improve as traders, we have to run through the process of reflection and introspection in order to further refine our process.

If someone comes to the conclusion that nothing could be done differently in the lead up to the occurrence of a failure, then they can lament their lack of luck all they want. What truly matters is that they have gone about thinking about what they can do differently in the future.

A good way to illustrate this is with an example of a trader who employs a strategy that makes money by being short convexity.

While such a strategy makes small and consistent returns when volatility is low, it will lose a lot of money when a black swan event hits the market. When this happens, the trader’s first reaction would be to blame it all on bad luck, complaining that no one can know the future and when markets will crash.

But, is it really bad luck if you know beforehand that markets will crash and volatility will spike at some point?

While no one knows when this will happen, we do know that it will happen; not just from studying what markets have done before, but also from the way markets follow a Pareto distribution.

As such, stubbornly sticking with a short convexity strategy is playing with fire, or picking pennies in front of a steamroller, if you prefer.

This makes getting burned, or steamrolled, by the markets inevitable, and not a matter of bad luck, but wilful disregard.

Take the time to reflect on your trading mistakes and make changes to your trading plan and/or strategy if need be; your future self will thank you.