Planning to Fail

When it comes to being successful in trading, there's one key ingredient: failure. In fact, you have to actually plan to fail. Potentially successful trading might be boiled down to these three essential steps:

1. Take action.
2. Plan to fail.
3. Correct your failures and capitalize on your successes.

I call these steps the Chart Traders Oops Method of Trading. If you think I'm joking, guess again. I'm not. I'm deadly serious.

Of course, the real logic behind my Oops Method is that you must constantly be testing, learn from your tests, contain the damage of your failures, and reap all possible profits from your successes.

To find out how to do this, let's examine each step in detail.

Step 1: Take Action

The biggest mistake most traders make is that they take little, if any, trading action. There are two main impediments to taking the action that's actually the lifeblood of your trading.

First, an active approach to trading seems to get lost in the flood of daily duties. Second, many futures traders suffer from a mental form of constipation when it comes to trading.

They spend hours wondering and worrying about what to do, what will happen if they buy and what will happen if they sell.. They focus on all the wrong issues: What could go wrong ...Why a trade won't work .... Shouldn't they try something else first .... and on and on until all momentum is thoroughly crushed.

Here's how to overcome this problem and move yourself to action. Ask yourself the following two questions.

1. If this trade tactic works, what will the benefits be to me?

Some potential answers are more money, increased ability to try additional trade tactics, and more confidence in your trading.

What is the most I can lose by doing this? - This key question will often snap you out of your worries. Once you can quantify the possible damage, you'll know whether the action is worth taking. If not, it makes it easier to move onto evaluating the next logical action.

Remember, if you just keep doing what you've always been doing, it's guaranteed that you'll stay exactly where you are. You must take action.

Step 2: Plan To Fail

Yes, you must actually plan on failing. It's the only realistic way to go. Once you've accepted that you're going to have your fair share of failures, it takes the sting out of the situation.

You see, trading is an ongoing process. But most people treat it like a single, isolated event. If what they try fails, they give up. If it succeeds, they keep going until something else fails and then they give up.

Smart traders expect to succeed but plan on failing. What this means is that they have other options already set up in case their current tactic fails. This once agains points to the all important trading plan

Also, they test as prudently and inexpensively as possible to contain their damages. When one tactic fails they either modify it or kill it.

Step 3: Correct Your Failures & Capitalize On Your Successes

You should always consider every trade entered a test. As I've already said, the secret to damage containment is to test prudently. That means entering the market with ONE CONTRACT regardless of the situation. Test the markets direction and let it prove to you that your analysis is correct. Then you add aggressively as the trend continues.

When a trade tactic fails, you have to determine right away if it can be corrected or it should be stopped completely. Even if you shut it down, what did you learn from this test? Was your timing incorrect? Did you go after the wrong side of the market? Did you blindly take the trade on a tip?

The other half of this equation is to capitalize on your successes. How can you expand your trades to include even more realized profits? What is the current market rhythm and does it support the idea of adding to the successful trade? What aspects of your trading are particularly effective and could be used to boost the overall bottom line of your equity?

Trading failures are nothing more than the predictable result of searching for trading successes. When you begin to see failures as necessary steps on your road to success, you'll be able to manipulate them to your advantage.

As Thomas Watson, founder of IBM said, 'The way to succeed is to double your failure rate.'

The Perfect Failure Model

When you fly on an airplane, do you know how the flight crew successfully makes it to your destination? By failing 90% of the time!

It's true. They have a device called an inertial guidance system. The function of this system is to get the aircraft within one thousand yards of the runway within five minutes of the estimated time of arrival.

The plane strays off course thousands of times. Each time the system corrects the course. So the actual path that it takes to successfully get from one point to the other is error, correction, error, correction, error, correction, etc.

This is the exact same process with which you might achieve trading invincibility!

One last word on perfecting the failure/correction/success process:

'We are what we repeatedly do. Excellence, then, is not an act, but a habit.' -- Aristotle

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