6 Common Reasons Why Most Traders Fail
While most traders enter the markets with optimism, a large majority end up failing. According to The Balance, 96% of traders fail because they lose money either consistently over the long run or incur big losses they cannot recover from. And from that figure, about 80% of day traders stop within their first 2 years.
Only the top 1% earn the money everyone else is hoping to receive. In this article, we’ll look at six of the most common reasons why most traders fail and address some of the solutions so you don’t have to fail yourself.
The Emotional Rollercoaster
Many beginning traders say it is exciting to make a trade, watch the shifting of the market and feel the thrill when you win. This is the same set of neural circuits activated by gambling. Too many traders invest money to feel that excitement day in and day out without spending much time doing the research before each trade.
The thrill can become addictive, and after they’ve done it for a while, they start seeking bigger risks in hope of a greater emotional high. Too many traders take risks based on the potential payout instead of the likely outcome and end up losing big.
What’s the solution? If you have a gambler’s mentality, stay out of day trading. You’re too prone to making decisions based on adrenaline instead of reason. If you start trading to have something to do with your time or for the thrill of it, quit because you’re going to end up making bad decisions based on your desire to feel good. Don’t let the desire for a win cause you to deviate from the plan that helps you profit over the long run.
Many traders want to earn money, and their impatience literally costs them. Maybe they watch a few videos and start making losing trades instead of doing some proper research. Perhaps they rush into the next trade because they don’t want to miss out instead of doing the research that indicates which trades they should avoid. Others take their earnings and immediately invest in something else in the hope of increasing it instead of stopping and thinking about the new risk. The best traders take the time to study the price movements of a few stocks and trade those instead of rushing into the market.
Many traders make the mistake of assuming that it is easy, since they have a system and plan to follow it. While platforms like Stern Options make it very easy for newcomers to get their feet wet, you should do the proper research before you start trading. Watching a few YouTube videos and figuring out a “system” isn’t going to cut it.
Some people skip important steps such as researching the stocks they want to trade or understanding the types of options they want to buy all because they read some book with a magical formula for success. They don’t want to spend time getting the proper education or talking to professionals in the field to improve their odds of doing better.
What is the difference between winning traders and losing traders when they lose? The traders who win over the long term limit their losses. They don’t make irrational trades after they’ve lost in the hope it will turn around, because they know they lose on average 40% of the time if they have a good system and know what they are doing. They trade with stop losses to limit their losses when they make a mistake instead of hoping that it isn’t necessary, because they know they will lose sometimes. When they set goals, they stop and walk away to secure their gains instead of hoping that they can ride the wave even higher, whereas newbies tend to invest winnings in the hope of a bigger win until they lose it all.
Another variation of this problem is giving up after your first loss. An estimated 40% of traders quit in the first month because they assume that once they lose, they’ll keep losing or that it means they are irredeemably bad at trading. Trading is more like a marathon, not a sprint. Set parameters of the trades to minimize losses, avoid emotional trading, do your research and you’ll win over the long-term.
Some hand over their account to an expert with the trading desk assuming it will make them money, when in reality the agent’s goal is to earn themselves money. Don’t let anyone else trade on your behalf, much less someone who is paid on commission on every trade they make on your behalf. They will prey on your hope of higher profits to increase their income.
Some traders fail because they have a poor risk to reward ratio, keeping the losers out of hope that it will get better while selling the winners too soon and too often.
Searching for a Holy Grail
Many traders look for a single, perfect system. They skip from method to method, system to system, stock to stock, searching for a perfect one. The end result is that they aren’t familiar with anything they trade with and make the wrong decision most of the time. They make mistakes because they never stay with any combination of factors long enough to know what they are doing.
The Wrong Numbers
You need to determine the right trade parameters both to minimize your risk and maximize your gains. You need to have proper account sizing so that you don’t risk too much with each trade. Others make the mistake of using expensive platforms that charge fees so high it eats into their profit margin. Some traders make the mistake of looking at trading as a black and white or red and green system. You need to understand when things are getting bad and get out, containing your losses, not just waiting for some magic threshold to pass.
Think of this process as similar to a statistical process control chart for a production line. When the trend line is getting close and stays close to the unacceptable value, know the trends and numbers good enough to know when to quit.
Another variation of this mistake is borrowing money to buy options or cover losses, ignoring the interest and fees that accrue when you do this.
Traders fail for many reasons. This article explained the main ones.