Trading 101: The Key Ingredient to Sustained Success is Failure

My trading style uses fairly tight stop loss settings, which demands that my entries be pretty accurate with a small margin of error. In some trading circles, this would be seen as being “amateurish” for not allowing your trade to have breathing room to deal with the range of market volatility. Of course, most of those same trading circles view the market as mostly random in the short term that must be met with a ball park entry with a wide stop loss.

I used to trade with wide stop loss settings, or threw caution to the wind with “mental stops” rather than actual programmed stops. The market can gyrate so much that it’s an easy habit to get into. The market rarely moves in a straight line and can drift back and forth before making a definitive move in a particular direction. When stops are tight, it’s easy for price to move just enough against you to trip the stop loss before moving in the anticipated direction. This often happens enough to be a common frustrating experience among traders.

Using wide stops gives you more leeway when in a trade, but that also means your losses will be greater when they are tripped. Of course some traders don’t use stops at all- as that guarantees you will never be whipsawed out of a trade, but that also leaves you without protection if the market makes a big move against your position.

Not using stops is high risk, yet most traders including myself have engaged in such behavior due to the frustrations of getting whipsawed out of trades that would have eventually worked. But eventually the Grim “Stopless” Reaper cometh and will make you pay for not using stops. Eventually one learns to incorporate hard exits via stops, or the market will do it for you with severe losses that can blow out your account.

Over time I’ve learned that while using stops can be frustrating, and using tight stops VERY frustrating, it forces you to really focus on your trading system to find ways of improvement. Typically when a trade is entered that doesn’t work out, it’s one of three things:

  1. System is correct, but market had a random spike/dip due to some late breaking news.
  2. System is correct but the application of system was wrong.
  3. System has flaws that need to be worked out.

Out of most events encountered, #1, is VERY rare, while #2 is more common and #3 is typically the most common. One could say that #2 is a subset of #3 since proper execution is also part of the system.

I’ve been working on precision trading, where one can trade the daily battle between resistance and support with a fair amount of accuracy so as to not need to use wide area stops. Using tight stops and the ensuing failed trades and frustrations that resulted were actually great motivation in improving my trading system.

I find that my post trade analysis of failed trades have been responsible for the bulk of my trading system evolution. Preparation and planning can only go so far but I seem to be able to pick up so many more fine details of what went right and wrong when the analysis is done right after the trade is finished- likely because my plan is fresh in memory so it’s easier to pinpoint the aberrations. It’s a great feeling to spot a problem that was previous missed that when fixed, improves the accuracy of my system.

It’s a lesson I like to forget – that failure is a part of progress, since it opens the window for improvement. To get the best out of failing, it helps tremendously to have a clear and concise system trading plan that you can back track step by step to see what went wrong as well as what went right. A big mistake I’ve seen other traders make is “winging” trade entries in real time without a clear plan of specific entry and exit strategy. The point of system trading is the eliminating of seat of your pants “ad lib” style trading.





6 thoughts on “Trading 101: The Key Ingredient to Sustained Success is Failure

    • This is a common misconception about trading. What you describe is more akin to the thrill of “gambling”, which is far different than executing a well thought out low risk trading plan. A good trader should feel little emotion and not get excited whether their trade is doing well or not.

      Take competitive race car driving which you engage in. Outsiders will think participants are excited just to be able to gun the engine and drive a car at full speed around a track, but the drivers are actually blocking out the excitement of the speed and engine power, and are focusing on the less exciting details like watching the gas burn rate, how much time you can afford to spend at a pit stop, the proper timing to allow you to pass your opponent on a turn, etc… the small details that allow you to get an edge over the other skilled drivers.

      Trading is the same way – to allow yourself to be emotionally swayed by what can be won or lost means you aren’t focusing on the details of the trade, which is now more likely to fail. That is the problem with gambling addicts, who derive almost the same amount of pleasure from losing as the do from winning- just being in the realm of uncertainty is the drug that keeps them hooked.

      Trading is best when it’s engaged as boring and routine. Now after the trades are done and completed well, you can look back and enjoy the results. =)

      Liked by 1 person

      • So I think you probably haven’t raced a car, because while we do concentrate on those, there is a huge, massive adrenaline rush with going fast and feeling it through your butt. It’s a delicate balancing act.

        I think it depends on why you do what you do – traders that trade for fun versus traders who do it for a living. 🙂 I’ll keep my day job and just have fun. Life is too short to take the excitement out of exciting things!

        Liked by 1 person

        • I think you hit the nail on the head – doing something for a living is usually at a different level of focus than as a hobby or recreation.

          I would strongly caution against trading for fun though, due to the potential risk of much higher losses compared to spending time in Vegas. A few months back I wrote a post about a hobbyist trader shorting the market who wound up losing about $135K overnight on a casual trade. His account only had about $35K, so he was on the hook for the rest and was thinking about having to cash in he and his wife’s retirement accounts. People forget that leverage is a big bat that can swing both ways.


  1. A fascinating discussion in an area I have almost no experience with. My only reference might be how, when building a 2 or 3 week construction project I for some reason resist at night comparing progress with the projected schedule of hours or materials. I prefer to be surprised, plus or minus, after completion, rather than to work on glumly having noted an over-run… or conversely being over-euphoric . I guess the only real parallel is the psychology aspect.
    The paradoxical adage “Quit while you’re ahead” does come to mind: as in: ‘How much ‘ahead’ is enough ‘ahead’?
    I do wish you luck though, in what, as a guy who spent all his youth milking cows (concrete assets) will always think of as a ‘derivative’ bizness.


    • To be able to work on a project without having to worry over the budget or schedule sounds pretty good. My main assigned projects at work have usually been multiyear endeavors where you get assigned a scheduler where you discuss progress made and team hours used. Things get messy when there are overruns in time/cost, which is typically due to the delay of other components not yet delivered by other teams.

      I think the best analogy is after the project is done and you do a best methods analysis on what went right and wrong on the project. The usual answer is the engineers need to have more time and management needs to stop promising cutomers schedules without confeering with engineers, which management typically ignores. =)

      I’ve learned that no matter what door you go through in pursuit of financial stability, there are a range of pros and cons. The corporate route gives you a steady paycheck along with nice benefits, along with the cons of them owning your time and having limited opportunity to boost your income outside of the periodic payraises as well as the threat of layoffs. The small business route gives you much more independence and a shot at greater wealth, but much more time is spent getting your business to the point of needed profitability with no guarantee of success. It’s always amazing to see the businesses that strike gold right away like with Facebook where you go from zero to billions almost overnight being at the right place at the right time. The internet is the gold rush of the past with the rise of all these new social netwoking/sharing companies.


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