Stock Exchange: Biggest Cause of Trading Failure

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods, including current ideas;
  • Feature advice from top traders and writers; and,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!


Our previous Stock Exchange considered the importance of using discipline when entering and exiting trades. If you missed it, a glance at your news will show that the key points remain relevant.

This Week – What are the Biggest Causes of Trading Failure?

To frame this week’s discussion, we share a quote from Gustav Mejlvang at DayTraderLand. He does an excellent job of describing how “position sizing” can be a source for trading failure, particularly among new daytraders.

“Position Sizing is unfortunately very undervalued, especially for new daytraders who are often more interested in learning methods and setups.

The method constitutes only one third of a successful daytrader’s strategy, where the two other – and least equally important – are psychology/mindset and risk management. Method is definitely exciting, but in my opinion it’s far from the most important thing to focus on if you want to succeed with your daytrading.”

Gustav goes on to explain how position sizing can be used to control risk, and why limiting losses can prevent you from making psychological trading mistakes.

Sticking with the importance of trader psychology, Dr Steenbarger (the author of “The Psychology of Trading”) explains how pain and guilt are important parts of health in trading because they can tell us when we’re on the wrong path in this article: “The Power of Regret in Trading“.

However, in his next article titled “Turning Trading Anxiety Into Growth,” Dr. Steenbarger goes on to explain how your fears and anxieties may also be preventing you from taking enough risks. Both are worth the read.

And sticking with the “fear” theme, this recent DealBook article explains how trading in Wall Street’s Fear Gauge (The VIX) has been proliferating. Specifically, the article reviews how the volume of VIX related trades is growing, and how one day trader has made millions in recent years betting that market participants have been too fearful (i.e. this trader has been betting against The VIX). However, the article goes on to draw some similarities between the growing popularity of day traders trading The VIX now versus tech stocks during the tech bubble. And if anything else, this is a reminder of the importance of position sizing for day traders—one of the biggest causes of trading failure. I’ve certainly had many friends “blow out” including some with multiple such events.  Rarely is it a slow grind.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark D. Hines). Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Holmes: This week I like Westinghouse Air Brake Technologies (WAB). This stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see WAB is well below its 50-day and 200-day moving averages. This one has attractive upside potential.

Blue Harbinger: Interesting Holmes. Do you realize that the sharp price decline was because the company missed its second quarter earnings estimate and lowered guidance for the full-year 2017? According to the earnings call transcript, the CEO explained that the negative results were mainly the result of revised timing of sales and projects already in the backlog and to the market conditions which they’ve previously discussed as “rebounding slower than we anticipated.” Did you know all that, Holmes?

Holmes: As usual, Blue Harbinger, that’s a nice story, but my style is dip-buying and mean reversion. So no, I was not aware.

BH: Do you even know that Westinghouse provides technology-based equipment and services for the global freight and transit rail industries? How long do you plan to even hold this position, Holmes?

Holmes: My average holding period is about six weeks. I’ll exit when my price target is achieved, and I control risk with macro factors and stops.

BH: Well, that’s nice you have a process in place. I actually like this industry as long as the economy continues to grow. Any signs of a recession and this position could be in trouble.

H: Again, Six-weeks is my average holding period. I’ll be out of this trade long before the economy slows. Besides, Q2 GDP was just revised upwards this week from 2.6% to 3.0%. Doesn’t sound recessionary to me. How about you, Athena, what do you have this week?


I like Take Two Interactive Software (TTWO). As you can see in the following chart, it has some attractive momentum on its side.

BH: Athena, RoadRunner would be honored you like TTWO because it was his pick three weeks ago, and so far he looks very smart considering the shares are up and he typically only holds a position for 4-weeks.

Athena: My process is totally different than his. I buy things based on momentum, and I exit when my specific price target is met. On average I hold my positions for about 1-month, and TTWO has more upside ahead.

BH: Well, as I mentioned to RoadRunner, Take Two seems fairly risky to me. I agree it appears to have some momentum on its side (video game sales continue to show strength), but the company is barely profitable (in fact, net income was negative in 2015 and 2016), and the entire franchise is heavily dependent on the success of one video game, Grand Theft Auto. Any missteps with the next release of that game could spell disaster for Take Two. Plus its price-to-sales and price-to-(forward)-earnings ratios are already very rich.

Athena: I have stops in place in case the trade moves against me.

RoadRunner: I am definitely honored that Athena likes my TTWO pick from three weeks ago, but this week Valeant Pharmaceuticals (VRX) is attractive.

BH: Interesting pick RoadRunner. I seem to recall a famous hedge fund manager that got burned badly on VRX. Any particular reason you like it?

RR: I like VRX because it’s at the bottom of a rising range as shown in the following chart.

BH: As I’m sure you are aware, Valeant is a pharmaceutical and medical device company. It has a lot of debt and basically no profits. Do you really think it can pull itself up by its bootstraps?

RR: My typical holding period is four weeks, so I’m not looking for VRX to become some sort of a long-term self-help story. I’m simply expecting its price to go higher over the next four weeks as it achieves a higher position in its rising channel. I get in and out at opportune times. How about you Oscar, what do you like?

Oscar: I like the Global X China Consumer ETF (CHIQ).

BH: Well I’ve got to hand it to you Oscar, you picked quite an ETF this week. This ETF provides exposure to a basket of Chinese Consumer stocks, and it’s up about 42.6% so far this year versus only about 10.7% for the S&P500 (SPY). Plus it holds some incredibly hot stocks right now like (the online direct sales company) and Alibaba (the online mobile commerce company). If you think Amazon has been hot this year (+30.8%) it is boring compared to (+65%) and Alibaba (+95%).

Oscar: I invest in momentum, my holding period is only 6-weeks on average, I rotate to something better when I’m ready to exit, and I use stops to control risks. And CHIQ is attractive right now.

BH: I respect your approach and your track record of success, but have you considered the potential volatility? When these types of stocks fall, they can fall hard.

Oscar: That’s why I’m invested in a basket of stocks through this ETF instead of individual names. CHIQ holds 39 stocks.

BH: Well- I like the idea of having some exposure to emerging markets, and this is certainly one way to do that. Are there any other ETFs you like right now, Oscar?

Oscar: For your reference, here is my list:

BH: Thanks for that list Oscar. How about you Felix, are you willing to share your list this week?

Felix: For your reference, here is the list (below). And just so you know, my average holding period of 66-weeks is quite a bit longer than the rest of the group.


There are many sources for trading failure, but a couple of the biggest are related to position sizing and psychology. For example, guilt and regret are psychological signs that we’re on the wrong path. Also, being able to overcome psychological anxiety can help us grow into a better trader. Further still, position sizing is critically important, often much more so than many new (and some veteran) traders realize.

Stock Exchange Character Guide

Background on the Stock Exchange

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out  for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

You may also like