Why Traders Fail
he following is an interview given by Mr. Chambers on why traders fail. Also covered are some strategies that CFTI clients are encouraged to use. These strategies are designed to increase a trader’s chance of long-term success.
How long have you been involved with the markets?
Ward Chambers: I’ve been involved with active trading since early 1992. Actually, I got my start trading crude oil and natural gas. At that time, seasonal patterns made those markets very predictable and relatively easy to trade. I moved over to currencies and bonds in 1996 and I rarely leave those markets now.
What does CFTI do? What is your role as a Trading Strategist?
WC: CFTI is not a brokerage or software firm. The failure rate in trading is at least 95%. There are lots of reasons for such a high failure rate. Poorly trained brokers, software packages that can’t adapt to changing markets, and poor understanding of risk management are just some of the more common ones. CFTI’s purpose is to help traders devise strategies that allow them to be consistently profitable.
The big question on trader’s minds; is what holds people back? Why do so many traders fail?
WC: I’ve identified several key factors that I have seen literally thousands of times, which virtually guarantee failure. The first one is a serious lack of risk management skills and planning. This kills me every time I see it. Of the nearly 3,000 traders I have spoken to over the years , fewer than 20% understand and apply a well-constructed risk management plan. This goes well beyond simple stop loss orders, which only lock in losses. It entails structuring a trade so that if the move you expected fails to take shape, you are still able to turn a profit on the trade, or at very least, walk away with a very small loss. CFTI focuses on eliminating risk from every trade as soon as possible. We teach clients how to structure their trades so that they can maximize returns and avoid devastating losses. If a trader likes to gamble, that’s fine, but if he wants to make money, he should be talking to us.
Can you give an example of how you structure trade?
WC: Sure. One of our clients loves trading Euro currency futures. Before joining our mentoring program, he had tried a lot of other courses and software, only to take a $40,000 hit in his account. He learned nothing about real risk management. We taught him a new swing trading strategy called “stacked position trading,” and now he’s averaging $275 per day. The beautiful thing is that he never risks over $200, and if the trade doesn’t come together right away, all he needs is some patience. He knows that profits are right around the corner.
It sounds as though he is able to sleep well, no matter what happens in the market. What’s another cause of failure for traders?
WC: The lack of overall knowledge among traders is staggering. This is a major challenge for new and experienced traders. To give a quick example, I have asked hundreds of traders to tell me what the “sister” report to the US Trade Deficit is, and not one has been able to supply the correct answer. If you trade currencies, bonds or indexes, you should know the answer is the TIC data. The trading landscape is strewn with thousands of books, tapes, seminars, and courses that it seems nearly impossible not to have enough knowledge to trade. If this were the case, there would be a 95% success rate among traders; instead there is a 95% failure rate. The fact is that nearly every information source available has one main objective: to sell you something other than useful knowledge or information. My personal commitment to all of my clients is to supply them with useful, applicable knowledge so they can see the trading world exactly the same way institutions and hedge fund managers see it. Knowledge by itself is useless ; knowing how and when to apply that knowledge is real power, and that normally equates to real profit.
There must be some quality offers out there that will benefit traders, correct?
WC: Of course there are. What I’m saying is that the primary purpose of promoting a book is to get a sale, not to improve the reader’s trading. While I’m on the subject of books, if there were one book that had all the secrets to successful trading, wouldn’t it be a best seller? Then we have software vendors. Let me state that one of my former courses of study was software design. When it comes to software, why would I sell it to the public for a one time fee if it were that great? If I could develop a program that accurately predicts market movements 70% or 80% of the time, I would license the software to the big brokerage firms and investment banks for $10,000 per year, per user. Don’t you think top quality firms would pay that small fee to gain such a massive edge over their competitors? They would pay $10,000, or more, with a smile on their faces, secure in the knowledge that their investment would pay for itself in less that a month. If a major brokerage firm won’t buy the software, why should anyone else?
That’s an excellent point. I hadn’t thought of things that way. Let’s move along. What’s another reason traders fail?
WC: The improper use of stop loss orders. I’ve touched on this before; now I’d like to go more in-depth with this issue. Stop loss orders are an excellent way to prevent major losses in an account. The drawback is that once triggered, stop loss orders also lock in losses in that particular market and on that particular trade. I had one client who was using a $450 stop loss every day, trading the British Pound. He could not figure out what was going on in his account. He calculated everything to perfection and placed his stop loss order. After he saw his $10,000 account shrink to under $5,000, he came to CFTI for help. We showed him how to structure trade without stops and still limit his downside risk to only $200. Our strategy also allowed him to stay in the market much longer, giving market forces the time needed to swing things into his favour.
You’re always talking about structuring a trade properly, what exactly do you mean by that? Isn’t a trade a straight forward calculation?
WC: I’m glad you brought that up because it brings me to my next point. Trading is rarely ever a straight forward calculation. There are so many variables to take into account that you need to use options, in addition to futures, to maximize your profit potential and minimize your potential losses. Traders have a woefully inadequate amount of knowledge when it comes to options. So many people think that you simply buy a call or a put and that’s it. The more “advanced” traders know something about spreads, but the extent of their knowledge seems to stop there. Simply buying options is a guarantee of failure over the long term. I know several firms offer courses in option writing, but that area of options can be very risky unless you really understand how markets work. Did you know that by using the proper combination of buying and selling options, and taking positions at the right time, you can actually guarantee yourself a profit of between 7% and 15%? I find that many traders are unwilling to learn how to properly use options. They always have some insane excuse, and they never become profitable traders. How can they if they turn their noses up at a guaranteed 7% - 15% return? I’m going to say this very clearly : If you intend to succeed as a trader, you MUST fully understand how options work. CFTI teaches clients exactly how to use options to structure their trades for maximum profits. We teach clients how to blend option trading with their regular trading to really unleash profit potential in each trade and minimize risk. Successful traders know exactly what I mean when I state how important it is to do those two things over and over again.
It’s very rare that anyone takes such a strong stance when it comes to options. Why do you feel so many people lack the skills they need when it come to options?
WC: Overconfidence and a near total reliance on technical indicators. I’ll address the issue of overconfidence first, then move into the over-reliance on technical indicators. In mid 2004, I met a trader who purchased two pieces of software. One he purchased from a popular futures website and the other he purchased at a seminar. He used them both for three months, and he made money. He then took $300,000 and put it into the markets using his two software programs. His investment grew to $350,000 and his retirement plans started to get moved forward very quickly. This was when I told him to make sure he monitored his positions because a 16% gain in under 6 months was a very good return. He told me he was confident that his account would be over $700,000 before the end of the year. Then January 1, 2005 rolled around and the markets he was in went crazy. His account plunged from about $400,000 down to $75,000 and he realized that the software wasn’t able to change as fast as the market dynamic. The real tragedy was that the loss crippled him psychologically as well. He was never able to attain the mindset to recover his losses. His error was that he placed so much faith in an automated system that he stopped thinking for himself. This is something I see all the time, which is why I monitor everything very closely whenever I am in a trade or even considering a trade. Remember, I want to minimize my risk as much as possible while maximizing my profit potential. That’s what CFTI does, and that’s what we teach our clients.
Now, moving on to the over-reliance on technical indicators, the two programs the trader I was talking about used some very advanced technical indicators – and he still lost $325,000! Technical indicators have their place, but if successful trading were simply a matter of using technical indicators, then there would be a lot more successful traders in the world. When using them, one has to remember that nearly all technical indicators are rear facing. As traders we focus on the future, not on the past. It’s easy to build a track record when you’re looking at the left side of the chart, but if you want to impress someone, try predicting what will happen on the right side of the chart. My clients learn what to watch for on the charts so that they can make intelligent trading decisions. I believe in teaching them how successful professionals trade because I want my clients to become highly successful traders. I prefer stories about clients who I have helped to generate incomes from trading, rather than the very few people I couldn’t help.
If technical indicators aren’t the answer, why are they so heavily promoted? In your view, what is the answer to successful trading?
WC: Because they are easy to use. It’s so convenient to say, “Just put this template over your chart and you’ll make tons of money.” Life just isn’t that simple, and neither is trading. The best approach I’ve found is what I call “Statistical Analysis.” It’s the approach I use whenever I issue a strategy paper, or I’m devising a strategy to help a client become profitable. It uses some technical data, some fundamental data, and loads of research. Then the trade can be constructed with the smallest amount of risk. For example, in mid November, 30 year bonds were falling sharply, but there was an auction of 10-year notes due. I researched the market psychology and mood, and correctly determined that the 10-year auction would be very successful. I then issued a strategy paper outlining a 1-day bond trade. The risk was about $250, but the maximum profit potential was $750. I calculated the odds of success at 72%, of which I notified clients in the strategy paper. Sure enough, the next day, the trade showed a profit of $531.25 and we closed it out. That was a statistically sound trade. It required about $1,200 in an account to take one position. This came out to a return of 44% in one day! While I don’t keep track of every bank in North America, I’m going to guess that not too many paid that much interest on deposits last year. Statistical analysis, in my view, gives all traders the best possible chance of becoming highly profitable. That’s why CFTI supports it so heavily and why we encourage our clients to use it on a regular basis.
What else can traders do to increase their probability of success?
WC: Putting together a game plan, with preset objectives is another powerful tool. I have a daily trade letter called The CFTI Sentinel, which outlines precise entry and exit points. These levels are generated using the same type of calculations institutional and hedge fund managers use. It’s a myth that these managers make huge profits on every trade. I’ve seen many of their trade logs, and I can assure you that top performing, actively managed funds are built on a lot of small gains that add up. For example, do you know that if you trade only 220 days a year and you average11 points per day on the Euro currency future each day, on the 221 st day you will have grossed over $30,000? Even if you paid a $50 commission you would still gross over $19,000. Would you not be happy with that kind of a return on a $5000 or $10,000 account? How would most people’s lives change if every January 1 they took $19,000 and applied it to their mortgages, children’s education fund, or just paying off other debts? What kind of a vacation could you take with an extra $19,000? Those are the kinds of results CFTI targets for each client. The people I personally work with get a tremendous amount of hands on coaching. In my view, only the truly hard headed trader wouldn’t want results like this. Here’s an example of our trade targets for the Euro one day in mid November, which CFTI’s clients receive every morning in our daily newsletter, The CFTI Sentinel:
As you can see, our clients have clearly defined entry and exit points for both up and down moves in the market. This saves them time and energy. They are able to simple look at a chart or price ladder and enter their entry and exit orders. Usually, we are out of the market before 11a.m. This is what I mean by a game plan. When my clients turn on their computers, they quickly learn what’s going on in the world, and they have a ready-made attack plan for each trading day.
What about longer term plays?
WC: I feel every trade should have a well put together long term strategy as well. In August I realized gold was going to make a good solid run. I encouraged my clients to go long on April gold at $449.00 an ounce, using options as protection. Recently April gold hit $550 per ounce, which represents a sizable profit. Now my clients and I are writing near term options so we can really maximize our profits. I have several clients who took 3 positions, and they are up over $25,000 on their initial positions ! Now we are free to write near month options, which we recently did, bringing another $2,000 into our accounts. The worst case scenario is that we could get stopped out with a $27,000 profit. I may be wrong, but I think there are worse things that could happen to my clients.
You seem to have put a lot of work into the development of your Statistical Analysis model. Does it ever stop?
WC: The Statistical Analysis approach, by definition, will only stop evolving when markets stop changing and growing. It’s effective because it grows with the markets, always expanding its boundaries. I encourage my clients to keep a detailed log of their activities so they can have a very valid reference tool. To answer your question directly, Statistical Analysis is always growing and I believe it will be the next wave in trading.
Is there anything else traders do to undermine their own success?
WC: I could write volumes about the things I’ve seen, but I’ll just mention this last one. Traders are far too sensitive to commissions. Realistically speaking, a commission of $15 to $25 for a good, full service broker is very fair. Discount firms are excellent at making losses seem like the fault of commissions, but in actuality, the main causes of failure are listed above. I always laugh when a trader boasts about paying $10 commissions and then makes 300 trades a day. Too many times that trader still loses money. There are brokers out there who should pay you to take the risk of becoming their clients. I’m more than open to people contacting me and asking whom I feel they should deal with.
Thanks, Ward, for your time and honesty. It was really appreciated.