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.




The Paradox of Failure and Success

Everyone loves to succeed. We love the feeling of being successful. On the other hand, everyone wants to avoid failure and the negative feelings associated with it.

The paradox is success is typically built on the shoulders of failure. Before we can hope to succeed, we have to step up and try and achieve.

To try is to risk failing that task, but it sows the seeds of experience that can grow into further progress on continued attempts.

Failure is also the seasoning that makes the taste of success so sweet. The more difficult and complex the task, the more energy and effort one puts in, the greater the feeling of satisfaction felt achieving the desired goals. Success easily obtained doesn’t feel as special as that which is hard fought for.

Success and failure are intertwined – those who allow themselves to be scared off from trying due to fear of failure will also limit their opportunities for success.