Most of the time, failure is not a good thing. We do whatever we can to avoid it. We don’t talk about it when it happens to us. And, at times, we are glad when it happens to our rivals.

However, when it comes to trading and investing, failure can be a very good thing.

Think about this. In baseball, the leading batter hits for perhaps a .350 average. The great Ty Cobb hit for a .420 average in 1911. Bringing is a little closer to home – well, very little – Pete Rose took the crown in 1973 with a .338 average.

Forget his other antics, Rose was a good hitter. But when he led the National League that year he got a hit one time in three at bats. That’s one-third success and two-thirds failure.

I think you see where I am going with this. Even champions fail. What’s LeBron’s record in NBA finals? He’s three for eight. That’s a 37.5% success rate but who can say that King James in not one of the greatest players of all time?

OK, you argue that even getting into the finals is success. Well, not to world-class athletes.

And as long as we are on sports, Barry Sanders, Deacon Jones, and Tony Gonzalez never even got to play in a Super Bowl. Great players. Failed goals.

Now let’s take this to investing and trading. You wondered when I’d get to that, didn’t you?

The biggest critics of chart reading will say that chart patterns are meaningless. The market breaks out and then turns around. Put another way, the breakout fails.

Well, if you just look at the buy signal, for example, the percentage of correct calls is not perfect. I’d venture to say it is better than the baseball batting champ’s average but, say, one in two is still fodder for haters.

Use the Failure, Luke

How do we take this failure and win trading championships?

Take a look at this chart of the Russell 2000 index in 2017. It was a roaring bull market year and in July, the index broke through resistance to a new high. A buy signal, for sure.

But then things soured and the breakout failed

Enter the critics.

Here’s where we put failure to use as a benefit. Chartists like to say that there is nothing more bullish than the failure of a bearish signal. Conversely, there is nothing more bearish than a failed bullish signal.

Once the breakout failed, the ego-less trader would have immediately stopped out of the long and looked for a reason to go short. The Russell fell about 6% from the former breakout point. Not bad for a bull market, counter-trend trade.

Check out the Banks ETF (KBE) in August 2017. Super failure and a super buying opportunity.

Failure That Forewarns

There is a failure within patterns, too.

When a market is trading in an identifiable pattern, such as a flag, rectangle or channel, it moves from the top of the pattern to the bottom repeatedly. The more often prices touch these borders, the stronger the pattern and the more significant the eventual breakout will be. 

In this next chart, we see DR, Horton (DHI ) in an ascending triangle pattern. Technicals looked favorable with on-balance volume rising so the odds that the ascending pattern would resolve with an ascending trend seemed good.

But look at what happened in the latter portions of the triangle. Price action failed to reach the top of the pattern and that is a sign that something inside got a bunch weaker.

Eventually, the pattern broke to the downside. Failure saved the trader from jumping the gun and buying ahead of what turned to be a bearish move.

Don’t fear failure. Use it to change your mind about things. And remember, the failure is not with your trading but with a steadfast stubbornness to believe that breakouts are carved in stone. They are as fluid as the market and you must be fleet of foot and of mind.