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.





Stock Meltdown and Whipsaw: Robots Gone Wild

Today was another historic day in the markets – it was the greatest intraday plunge since 1987. This was matched by the mother of all whipsaws when the market dived over 650 points in just 15 minutes bringing the Dow loss to over 1000 points, only to surge back up over 600 points in just 8 minutes. To put it another way, the Dow moved over 1250 points in just about 23 minutes.


As you can see, the market literally falls off a cliff and then rapidly recovers much of the loss. That’s an incredible amount of volatility!

Here’s what it look like on the S&P 500:


As this was going on CNBC had live video of people rioting in Greece over the govt approved austerity measures as they try to climb out of their debt problem.

Just remember as you see these countries in financial turmoil, that much of the damage was caused by them having toxic CDO assets that went worthless. This is the gift the big investment banks have given to the world….yet you still have folks trying to justify their existence instead of scaling them back.

This super-sized whipsaw most likely caused big casualties in the market today. All those who had stop loss orders placed most likely had them triggered as the market plunged. It’s never fun to get stopped out of a position, only to have the market reverse and go higher. The market got me to cough up some shares before the real dive happened – thanks heaven I pulled the plug early!

The next set of victims were day traders- the human ones. The market moved so fast that if you weren’t fast enough, you were likely to either get burned on the way down, on the way up, or from both sides. I made a few mistakes and got singed here too. I’m sure a few folks manages to capitalize and make some money if they timed it right.

The third set of victims were the robot day traders. What ever triggered this dive (they are still investigating) took everyone by surprise and the machines just exacerbated the moves as their algorithms went with the flow. I’m sure some auto trading machines fared very poorly.

The only folks who escaped that whip were the ones ignoring the market. Of course, the aren’t completely unscathed as the market still ended the day with over 3% losses.


NYSE (ARCA) and NASDAQ have announced that the are canceling ALL trades that happened during the plunge/whipsaw for stocks that were more than 60% off were they were trading before the big moves. Not sure how this will be tallied in…

Apparently the latest track is that some traders fat fingered an execution and instead of executing a million trade sell, he triggered a BILLION execution instead.

No Country for Old Men…or Humans

Now there is talk about more regulations needed to control the level and timing of trading. With hyper fast trading, computers can now process and work on over 1000 bid/offers per second. There’s no way humans can compete with that on the short term. Manual trading gets safer the farther out you go in the time line as you have the longer term trends to support you.

Now everyone is getting worried again after months of “happy times are here again” complacency.

To be ahead of the game, all one can really do is stick to technical and trend analysis. Don’t base your decisions on the news or emotions, but keep them in mind in the background. The long term trends should be the primary markers to show you whether to be buying or selling.

It’s is interesting that turmoil in Greece can send sink our markets as well. It just shows you how connected we are. Don’t you find it strange though that when Greece first announced that had problems several weeks ago, the market shrugged it off and moved higher? This is why you can’t trade solely on news.

As I’ve said in ma prior post, fundamentals ALWAYS catch up to the market eventually despite the market’s willingness to ignore it for an extended time. This market is to be traded – buy and hold is high risk at this time.