Video 53A (#1 of 2)
Losing Because
of Mistakes
Al Brooks
How to Trade Price Action
Brooks Trading Course
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BrooksPriceAction.com
Main Points
 Beginners lose because of psychology
Slide
2
and false beliefs
 Bad management
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14
Slide 1
Beginners: Psychological Mistakes
Beginners lose most of their money
by mistakes due to incorrect beliefs (Psychology)
This video is on losing trades that beginners
make by mistake, and how to avoid or fix them
I discuss how to handle good trades that go bad
(Market Risk, which means bad luck) in the video
on Losing When Good Trade Goes Bad
It is a shorter video because
traders lose more money from mistakes!
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Slide 2
Beginners: Lose Because of Ignorance
Ignorance does not mean low IQ
Means lack of information
Smart person can be ignorant of some
ancient culture because he never studied it
or thought about it
Ignorance is barrier to making money
Easy to fix by simply spending time
being open to learning
Common ignorant beliefs that lead to losses:
1. Perfect setups exist
2. Noise exists
3. Most of time, either only bulls or bears can make money
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Slide 3
Beginners: Bad Management Decisions
Beginner sells,
betting on
Buy Climax
Beginner buys
Loses, despite good trade
Does not want much risk so
puts stop below signal bar
Beginners are often wrong in picking entries,
usually because they focus too much on risk
and not enough on probability or reward
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Beginners often make bad management decisions
Even when they know what the right thing to do is,
they conclude that this trade is an exception
that requires them to do something else
Slide 4
Confused Goals: Plan to Swing, but Trade Like Scalp
Beginners often takes trade as swing,
but manages as scalp
Not enough risk when 50 - 60% probability
of swing profit
Upset by 2 bad follow-through bars
Decides never really willing to risk to swing stop
Tightens stop to scalper's stop
Beginner buys
PB in bull trend
Loses, despite good trade
Preferred a small loss than to continue
to live in fear of big loss down at swing stop
Uses correct swing stop
below bottom of bull leg
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Slide 5
Confused Goals: Plan to Swing, but Trade Like Scalp
Lost his objectivity
Could not handle the anxiety of "What if?"
When enter as swing, manage as swing
No good reason to exit as scalp
Beginner buys
PB in bull trend
Uses correct swing stop
below bottom of bull leg
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Slide 6
Confused Goals: Plan to Scalp, but Trade Like Swing
Beginner often takes trade as scalp,
but manages as swing
Too much risk for too little profit
Beginner buys bull BO of bull flag,
even though possible DT
Upset that next bar is bear reversal
Uses tight stop
Would be embarrassed to lose
Knew he bought high in weak rally, like a loser,
but does not want to feel like a loser
Lowers stop to swing stop to increase probability
Exits with loss that is 4x bigger than his profit goal
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Slide 7
Confused Goals: If Scalp, Manage Like a Scalp
When entering as scalp,
manage as scalp and take the scalp loss
Cannot make money scalping if have big losers
Uses tight stop
Incorrectly believed this was a
good Buy The Close (BTC) bull trend
Did not realize it was Buy Vacuum test
of high close of day and possible DT
Did not see that it was possible Wedge Top
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Slide 8
Market Cycle: 10% of Bars Are in Strong BO
From the Market Cycle, traders know that
10% of bars are in strong breakouts up or down
Strong enough bull BO on the open for
70% chance of Measured Move (MM) up
based on the size of the BO
Take profit at MM target
Very positive Trader's Equation
High probability of MM based on Initial Risk
Only need reward of 1x Actual risk
Buy close of consecutive big bull bar
Closed on its high and above neck line of DB
Could wait to buy close of follow-through bull bar
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Slide 9
Market Cycle: 90% of Bars Are in Channel or TR
During the 10% of bars that are in a strong BO,
usually difficult to make money trading
in the opposite direction
Bear sold at prior high
If bear decided to stay short and
try to manage to get a profit,
he might sell more below 1st bear reversal bar
Might change goal and just try to avoid loss
Exit at average entry price
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Slide 10
Market Cycle: 90% of Bars Are in Channel or TR
Difficult to hold short for 40 bars during bull trend
Missed many buying opportunities
to make money
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Never fell to 1st entry price
Running out of time
Exit at average entry price on reversal up to
get out breakeven on entire trade
Slide 11
90% of Bars: Can Buy or Sell and Make Money
90% of the bars are in channel or TR
40 – 60% chance direction will continue or reverse
Probability for bulls and bears is between 40 – 60%
during 90% of the bars on every chart
From Trader's Equation, trader knows that
even with only 40% probability,
it is winning strategy to exit with reward
at least 2 times Actual Risk
Bad management is the major cause of losses
Must manage position size, risk, and reward
If fail at any step, you will lose money
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Slide 12
Main Points
 Beginners lose because of psychology
Slide
2
and false beliefs
 Bad management
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14
Slide 13
Bad Management: Causes Most Losses
From Trader's Equation, trader knows that
even with only 40% probability,
it is winning strategy to exit with reward
at least 2 times Actual Risk
This means that during 90% of the bars,
both bulls and bears can make money
by managing trades correctly
The reason for most losses is bad management
When managed well, 90% of time can get out
breakeven (without a loss)
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Slide 14
Good Management: Can Save Most Bad Trades
During 90% of bars,
even buying at top or selling at bottom
can be managed to avoid loss
Stop
Sell BO below neck line of DT
Sell more below
bear reversal bar
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Exit shorts with small profit on reversal up
from Micro DB test of 1st entry
Slide 15
Good Management: Can Scale In to Avoid Loss
During 90% of bars,
even buying at top or selling at bottom
can be managed to avoid loss
Stop
Buy BO above ioi Bull Flag,
even though far above MA
Buy more on BO of High 2 Bull Flag
Exit with small profit at 1st entry
Stop
Sell BO below neck line of DT
Sell more below
bear reversal bar
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Exit shorts with small profit on reversal up
from Micro DB test of 1st entry
Slide 16
Lose Money: Experts Lose, but Are Quick to React
Experts also lose money by taking bad trades,
where it is difficult to structure strong Trader's Equation
This means hard to make money over time
Usually do not realize it until soon after entering
Experts minimize the loss
by managing the losing trade well
Bear sells strong bear close
Failed BO above yesterday's high
Micro DT, close below low of day
Higher probability to wait for bear follow-through,
which never came
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Slide 17
Enter By Mistake: Get out Immediately
Buy close of consecutive strong bull bar after:
Bear Trap
High 2 Opening Reversal up from MA
2 big bull Give-up bars
More than made up for loss
Disappointed by bull follow-through bar
Tried to get out breakeven on next bar,
but not filled
Exit with small loss on reversal up
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Slide 18
Bad Trade: Bad Trader's Equation
Buy High 2, failed BO below low of day
Signal bar has bear body,
but close above midpoint so reversal bar
Signal bar not big so risk is small
Beginner loses money
by doing something he should not do
Beginners take many bad trades
These are trades where the Trader's Equation is bad
Either the probability or risk/reward is too low
to result in a profitable strategy
H1
Stop
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H2
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Slide 19
Bad Trade: Also Need to Consider Reward and Probability
Beginners like to scalp because risk is less,
but reward is also less
Can win 60% of time and lose money!
H1
H2
If risk is greater than reward,
60% probability is not enough
to have positive Trader's Equation
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Slide 20
Bad Trade: Opposite Trade Is Often Good!
Low risk usually means low probability
Minor reversal means low reward
Math is better to sell
Experts sell the close of bear follow-through bar
or above high of bear bar (buy signal bar)
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Bad trade:
Buy signal bar was reversal bar
(close above middle), but bear body
8 bars without bull body so no Buying Pressure
Tight Bear Channel so minor reversal at best
Bear follow-through bar after big bear BO
so Sell The Close bar
Slide 21
Bad Trade: Beginners Manage Badly
Beginners also manage bad trades badly
Buy more on 2nd signal
Beginner exits long with
big loss on double size position
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Slide 22
Lose Money: Bad Trade Selection
After watching trend for 10 – 20 bars,
beginner waits for the strongest trend bar,
believing momentum will have follow-through
Beginner buys close
of big bull bar
He is entering when now
low probability and big risk (stop is far)
Math is better to bet against
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Beginner sells close of
consecutive big bear bar
Slide 23
Lose Money: Buys Too High and Sells Too Low
Beginner is so afraid of loss,
that he wants very high probability
When he sees big bar late in trend,
he thinks it is confirmation that trend is strong
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Although he is aware that it
might be a climactic end of the trend,
the bar just looks too strong
Surely Goldman Sachs will give
him at least a little profit
Slide 24
Lose Money: By Not Doing What You Need to Do
Beginner loses money by
not doing something he should do
Beginner buys High 2
Before he enters, he knows the probability is low
because of no bull bars for 8 bars,
and the obvious bear trend
Does not immediately exit
Does not exit below Micro DT
Does not put stop in market
Only keeps it in his head
Does not exit as market falls,
below his mental stop
Stop
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Slide 25
Lose Money on Good Trades: Bad Management
Beginners manage great trades badly
Sells bear follow-through bar,
after strong bear breakout,
into Always In Short bear trend
After thinking about how far his stop is,
he gets scared of losing too much money
Beginner only thinks about risk and
he ignores probability and reward
Stop
Places an appropriate stop
in the market
Stop is 3 times bigger than usual,
so trade only 1/3 usual size
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Slide 26
Lose Money on Good Trades: Use Appropriate Stop
Always use an appropriate stop
in the market that is not too tight
Trade small enough position size so that if stop is hit,
loss will not be too big
Stop
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Slide 27
Lose Money on Good Trades: Exits Too Soon
Beginner looks for credible excuse to exit
because too painful to wait
Convinces himself that logic is good
to take small loss above High 2 buy signal bar
Stop
Buys back his great short exactly where
expert bears are selling, expecting a bear trend
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Slide 28
Review
 Beginners lose because of psychology
Slide
2
and false beliefs
 Bad management
BrooksTradingCourse.com
BrooksPriceAction.com
14
Slide 29
End of Video 53A (#1 of 2)
Losing Because
of Mistakes
Al Brooks
How to Trade Price Action
Brooks Trading Course
BrooksTradingCourse.com
BrooksPriceAction.com
30