If you haven’t heard, the failure rate of traders is extremely high. Based on what I see, for every 10 traders that attempt only 2 will be consistently profitable (being optimistic here).
In this post I share with you the 6 biggest reasons why most traders fail, and hopefully prevent you from being one of them.
So what is the cause of such high failure rates?
Reason #1: Thinking it’s easy
You need to read this.
If you wanted to be a doctor and eventually make a 6 figure income every year, you have to pass a slew of gatekeepers. Beginning with your first four years of university.
Then medical school gatekeepers ensure that only those that are academically suited to enter the school. During your years in the school, there are numerous tests that judge your emotional abilities, to handle the job along with your intelligence.
Once you finish school, you know have to pass another gatekeeper, the licensing boards of each state.
Once you have your license, you now have to join a law firm or hospital which means you have to get by their gatekeepers.
Once you’re in, you now have to bust your ass for years to make partner or get to the point where you can open your own private practice.
The end result is that after 7-9 years of universities and 5-7 years of busting your ass for someone else, then and only then, will you consistently make a 6 figure income.
Now, let’s look at trading Forex. What do you need to become a trader? A frigging computer and $500. Yet everyone thinks they’ll be making a consistent 6 figure income in a few months or even years.
Forget the fact that the industry is full of some very, very intelligent people, who have spent years learning how to be a consistent trader.
Forget the fact that you’re going up against organizations that have millions of dollars to throw behind their traders in the form of support, such as analysis and system testing.
Forget the fact that these same organizations are playing on a different field than you are. All you need is a few indicators, a broker that doesn’t screw you too much, some money management, and in a year or two you’ll be living the high-life.
Is it any wonder so many fail? – Dopey
Let’s be honest here. I’m sure you ever thought that you could chill on the beach of Hawaii, enter a few orders into the market and poof, 5 figures starting pouring in every month.
Can it be done?
Yes but it takes sufficient capital and years of hard work to get there.
So this is the first reason why day traders fail, thinking it is easy to learn and easy to earn.
Reason #2: Analysis paralysis
After busting a few trading accounts, you will realize that trading is no easy feat, and you require more knowledge than simply knowing when to buy/sell. So you started reading books, browse through forums and sign up for trading courses to acquire more knowledge.
You learn about indicators that tell you when the price is overbought. Fibonacci numbers that projects price into the future. Candlestick patterns that signal reversals in the market. After a while, you encounter analysis paralysis, a state of over-analyzing a situation so that a decision is never taken.
You notice your RSI is oversold at the yearly lows and you are thinking of going long. But current momentum is against you, and price just formed a bearish engulfing pattern. So what now?
This is a typical example of analysis paralysis, where you have a so much information coming in at once, it cripples your decision-making process. You thought by acquiring more knowledge it will improve your trading, but it couldn’t be further from the truth.
If you encounter analysis paralysis in your trading, I would suggest you pick a few trading tools you are comfortable with and stick to it. Ignore the rest.
Nearly all successful traders I have known are one-trick ponies. They do one thing, and they do it very well. – Steve Clark
Reason #3: Going round in circles
In terms of trading, one of the most searched topics on google is trading strategies. Traders are simply fascinated by trading strategies, thinking there is a holy grail out there, to churn profits month after month. I wasn’t spared from it either.
I was lost and confused in my early years of trading. I was trying to learn different trading systems, thinking it will make me a better trader. I would try out a new trading system and made some money at the start.
Eventually, when the drawdown came, I would abandon the system and hop on to the next best thing. Rinse repeat all over again.
It is not hard to find a trading strategy. Go to any trading forums and you can find countless threads on it. But finding a trading strategy that has an edge in the markets and suits your personality, is a different thing altogether.
So how can you overcome this?
There is no better answer than to quote Anthony Robbins on this.
I’ll tell you now that the best strategy in almost any case is to find a role-model, someone who’s already getting the results you want, and then tap into their knowledge. Learn what they’re doing what their core beliefs are, and how they think. Not only will this make you more effective, it will also save you a huge amount of time because you won’t have to reinvent the wheel. — Anthony Robbins
So why do most day traders fail?
Simple, they spend too much experimenting instead of verifying.
That’s why they go in circles!
Reason #4: Poor risk management
A bank has 3 main office, the front, middle, and back. The front office is where sales are being made and all the glamour and hype is. The back office is the operation side of the business supporting the front office. One thing is no matter how great the front office is, it will not survive with a poor backroom operation.
And just like in trading no matter how great your trading system is, it will still fail if you have poor risk management.
Assume you have a trading system that wins 60% of the time with a 1 to 2 risk reward. Over the next 7 trades, your wins and losses look like this “lose lose lose lose win win win”.
If you risk 25% on each trade, by the 4th trade you will have blown up your trading account (-25-25-25-25).
If you risk 2% on each trade, you will net a 4% gain (-2-2-2-2+4+4+4=4).
Do you see the difference between blowing up your trading account and being consistently profitable lies in risk management?
This is why day traders fail; the lower the timeframe you go, the tighter your risk management should be.
You can have the best trading strategy in the world, but poor risk management, you still end up in the poor house.
No surprise risk management is a turn off to most traders, which could explain why most traders fail. If you want to succeed in this business, learn everything you can on proper risk management.
Reason #5: No plan to exit losing trades
I’ve seen many traders placing trades in the market with only an endpoint in mind, target profit. This is saying I know the markets will definitely go in my direction and I have no need to worry about a loss.
You put on a long trade and watch price moving in your favor almost immediately, hooray! Damn it feels good, makes you feel like you are in control of everything. Another 35 pips more to profit target!
Then you notice your trade starts going against you, and you have given back all your profits. You are now in the red. You believe it is a matter of time before it turns in your favor once more.
So you hold on to that belief, but the ticker continues to move further against you.
Heck, you’re no longer thinking about your target profits now, you simply want to get out at break even, and call it quits! Price slowly creep back in your favor, but not enough to put you in the black.
You hold on to the same believe still, as price now shows it is about to reverse.
The reversal didn’t come, and price broke new lows. Your trading account starts to race along with it. Your margin gets depleted day after day, eventually, the dreaded call comes in, margin call.
Now let’s look at it this way…
When you are driving a car, you require having a pair of brakes in it. Because you know there will be opposing traffic against you, requiring you to slow or even stop. If not you will be in an accident.
Likewise, when trading, you require a stop loss. Because you know the markets can go against you, no matter how good your analysis is.
Putting on each trade without a plan for exit is like driving a car, with no brakes on. It is a matter of time before you crash.
Trading is a game of probabilities. This means you always have the possibility of a loss on each trade, that’s why you always need to have a stop loss in place!
So, the next time someone asks you why do day traders fail…
You now know why.
Reason #6: No trading plan
A trading plan is to guide your trading towards the right direction. It covers everything from entry, exit, risk management, markets traded, time frame and position sizing. It is your blueprint for success. And no 2 traders will have the same trading plan, due to different risk appetites and personality.
Most traders enter the trading business with no trading plan. Trading based on gut feel, emotions or no trading plan is pure gambling. When you have no trading plan, you will be trading aimlessly and have no idea which area of your trading needs to be improved on.
There can be many reasons why you are not profitable. It could be discipline issues, psychological factors hurting your trading, or simply having no edge in the markets. Without a trading plan, you will never know what is the cause.
But when you have a trading plan you follow religiously, there will only be 2 outcomes. Whether it made you money or cost you money.
If it made you money, then you may have an edge in the markets. But if it cost you money, it tells you your trading plan needs to be worked on.
In other words, a trading plan allows you to filter out what is working and what is not.
This is why most traders never succeed, it’s because of the absence of a trading plan!
Frequently asked questions
#1: Hey Rayner, can you share with us an example of your trading plan?
If you want to discover how to develop your trading plan to become a consistently profitable trader, then check out this article I’ve written.
Trading is just like any professional career as an engineer, doctor or lawyer. It takes years of commitment and effort to get good at it, and you must be willing to learn from your mistakes.
That’s why it’s no wonder why traders fail, because thinking that it is easy and means to have a stable income like a job.
The beautiful thing about learning is that you can profit from the experience of others, to reduce your learning curve.
If you can reduce the number of trading mistakes, then you’d be a step closer to consistent profitability.
So, what do you think is the reason why most traders fail?