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The number 1 reason why traders fail…

Charlie looks at the key reason why so many traders fail plus shows an interesting chart pattern on the stock market indices…

Hi, this is Charlie giving you Monday’s video, I hope you’re very well.

The number one reason why traders fail, what is it?

The number one reason why traders fail is because they are…

…fearful of losing.

What does that actually mean?

Fear of losing usually equates to taking profits too soon because they’re so fearful of being wrong, of a market going in their direction for a while, rolling back over, then they take the profits too soon. They want to do that. They want to feel good in the moment about being able to take a profit.

There are a hundred other reasons why traders fail. Lack of discipline. There’s loads, but this is the number one reason. I know that because we speak to brokers. We have a number of different broker contacts and every one of them tells us that if they look across their book at traders that are failing, what they do is they run their losses too big and they take their profits too soon. That’s it.

If you’re running your losses too big it means you’re fearful of being wrong… Fearful of losing. You run your losses big because you don’t want to accept that you’re going to be wrong on that and accept that you have to bank a loss.

Likewise, when you’re taking your profits too soon it’s because you’re fearful that it might then roll back over.

Speaking to the brokers, that is the key reason.

They have algorithms that look across their traders, so they can just keep an eye on how their customers are getting on. Not on an individual basis, some brokers, especially if they are a market-maker broker, they need to ascertain their own risk, and if they’ve got a trader who’s very good then they need to make sure they’re hedging that.

What they’ll say is that they could have a trader come on board who could be trading at quite large sums, but if their risk to reward is skewed then the broker would be reticent as to whether to bother hedging that individual. It’s likely that at some point that individual will start to have a string of losers because their losses are bigger than their winners.

Can you actually trade with inverted risk/rewards and be profitable?

Yes you can, but what we’re talking about here is that so many traders don’t have a plan. so the way to trade profitably is to trade with a plan.

The first thing you need to do is get into a trade that you have a plan for before you’ve taken the trade. So many traders are looking for entry opportunities without any real analysis as to where they’re going to exit, not at least until they’re in the trade.

As we all know, once you’re in a trade, you’re more likely to be a little bit more emotional and it’s a bit more difficult to be objective. We’re more subjective towards a trade once we’re in it. So if you haven’t already ascertained where you want to take your profits then you’re likely to get it wrong, be subjective and  see all the other reasons why it might now roll over.

So you have to have a plan before getting in. Whether that’s a strategy with a number of rules, or whatever. You have to have a plan before taking a trade.

In the main, I think for a lot of traders, if you look for positive risk/reward trades, you’ll probably be better off. The problem with that, this is why so many traders get it wrong, is because you’re going to have to take a dip in your win-rate… usually.

So you could be trading with a 70% success rate but effectively your account balance is going sideways.

Well I would suggest dropping your win rate down to 50% or 60% and you might actually find that your win rate goes up, because if you drop your win rate, that means you’re looking for slightly larger targets and actually sometimes you can make more money that way.

I say sometimes because there are strategies which have high win rates that are slightly inverted risk/reward and they still work out very well, but you have to be very strict.

If you’re not strict with yourself, all that will happen when you’ve got inverted risk/reward strategies is that you will become very reticent of taking losses because you need that high win rate in order to be profitable. That can be a problem because then all of a sudden you don’t want to take a loss.

It’s interesting because I had an email just last week from an individual who confessed to me that he had made a mistake. Let me just go through this with you.

He had taken a trade and he had a stop, wherever it was. The market then started coming back down towards his stop-loss and he actually came out early thinking that it was probably going to come down to his stop-loss, and I’m sure a lot of traders will be able the empathise with this… I might as well take the loss now and save myself those extra few pips.

So he came out early thinking he was being clever, not wanting to take the big loss, so came out early thinking that it was going to go lower, and what happened? It then went all the way back up and he would have had a nice profitable trade.

Now, we’ve all done that in the past, myself, Kym, everyone will have made this sort of mistake at some point or other.

What was interesting is that this trader, as a result of that mistake went back over his trades in February and he found six instances where he’d closed out a trade manually before his original stop had been hit. So this has obviously happened several times, it hits his stop-loss and he’d come out early on six different occasions.

So he said he went back over and had a look at what would have happened afterwards. He said two of them would have still got me stopped out at the original stop-loss level, but four of them did turn around and go all the way back up. As a result he missed out on an additional 80 pips for that month by trying to outthink once he’s already in a trade.

So coming back to what I said earlier on, you must have a plan. if you have a plan, you stick to your plan.

Once you’re in a trade, the temptation is obviously still going to be there to come out early sometimes, but this is where you have to say, look I’m sticking to my plan because maybe on this occasion it’s going to come down to my stop-loss and stop me out, I know in the long run that if I stick to my plan I’ll be much better off.

The problem that most traders have is that they think in the now.  They think about this very trade that they’re in right now, whether it’s going to lose and the pain of losing. What they have to do is look at the bigger picture, not the outcome of what’s happening right now, but the outcome of what’s going to happen over the next 10/20/100 trades. If they don’t stick to the trading plan then they’re going to be missing out.

Anyway, hopefully that’s of some use to you. I just realised I’m eight minutes in.

I’m going to quickly have a look at the Dow Jones. I’m going to show you one chart and it’s a weekly timeframe.

On the weekly charts here we’ve made new highs on the Dow and we have now done a weekly key reversal bar, as we can see. We’ve made new highs above the highs of the previous week and closed below the low of the previous week.

So a weekly key reversal bar.

Now let’s have a look at the Russell 2000, another broad index… A weekly key reversal bar.

Let’s have a look at the NASDAQ… A weekly key reversal bar.

The only index that hasn’t is the S&P. The S&P did not to a weekly key reversal.

So I’m going to leave that with you to have a think about, but normally if you get even a daily key reversal, normally there would be some follow through to that.

The hardest thing is knowing how much follow through.

So I’m just throwing it out there for you for now, but we have had key reversal bars on the weekly charts across a number of these markets. Now bear in mind, these are weekly candles. We could go up for the whole of this week, for all I know, but still be playing off of this weekly key reversal.

All the time that we don’t break the high of last week then this weekly key reversal is going to be in play which means that there should be at be some movement off of that. I’m not predicting anything necessarily huge but certainly we should expect some more weakness to come in. I don’t know when, we could rally first, but we should see some weakness come in again yet.

The only shame is that we didn’t get it on the S&P, but we have had it across three of the key markets anyway.

I’ll leave that with you. Obviously if it breaks above those highs then that key reversal is completely null and void, but for now I think it’s an interesting development and an interesting chart pattern.

For now I’ll leave you with it.

Have a great week. Back on Friday for live trading.


  1. Darren Cornish-Reply
    March 9, 2015 at 11:42 am

    Interesting thoughts on the US indices.

    I am talking much longer time frames here, but i have recently reallocated a large part of my pension fund from equities to cash deposit.

    Yes i could miss out on a further 5% rise from here, but am happy to take that risk and sit back and wait for a re entry at much lower levels.

  2. Karl-Reply
    March 10, 2015 at 3:42 pm

    I’m fairly new to this so I tend to take profits at 10 pips and set a SL of 10 pips, my success rate with that ratio is about 63%. Today I tried sunning a couple on longer to see what would happen, so when the trade got to 10 pips I brought my stop up to break even and set a limit of 20 pips (just above the next set of support lines)… Anyway, long story short I made an additional £200 today running on the trades a bit longer than normal… Thanks Charlie!

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