Why Traders Lose Money In The Market
With all the fancy charts, fundamental analysis, and experience with price action, you would think that the majority of traders would be profitable. The sad fact is that most are not successful. The majority of all traders contribute to the profits of the minority that are profitable.
Why is this? If it was just a matter of being smart, then the trader with the highest IQ would make the most money. If it was only a matter of charting skills, then the trader with the most complicated charts would be the wealthiest.
Most traders have heard the statistics “95% of traders lose money” or “Only a few percent of traders make a living at it.”While the numbers vary slightly from study to study, the fact is many traders will lose money and it can’t be avoided. All sorts of reasons are given for the losses, including poor money management, bad timing, or a poor strategy. These factors do play a role in individual trading success…but there is a deeper reason why most people lose. Let’s explore fatal errors made by misguided traders.
- The biggest mistake that the majority of traders make at all levels, is that they trade too big. Big position sizes cause emotions to run high, infringing on reason. Big losses are also more financially and emotionally devastating. The position size of a trade should never put a trader’s lifestyle or trading career at risk.
- When the markets open, the trader must have the discipline to follow the plan they created when the market was closed. No system will work if the trader does not have the discipline to follow it.
- When a trader’s desire to be right is greater than the desire to make money, they will illogically let a losing trade run to avoid admitting that they are wrong.
- Fear of giving back a small profit will cause a trader to miss a bigger winning trade. Most profitability is based on the big winning trades. A winning trade should not be exited until there is a good reason to do so.
- If a trader does not take their original stop loss, they will allow small losses to become big losses. Big losses generally are what cause a trader to be unprofitable. Many good trading systems become profitable simply by removing the big losses from the trading results.
- Traders that do not account for events outside the known bell curve can be ruined. Events that have never happened before can happen. Hedges, stop losses, and position sizing are the insurance policies against the sudden risk of ruin.
- Traders with too much hubris will eventually make a decision that insures a fatal trading result.
- Personal predictions have no value, because the future does not exist in the present moment, no matter how strong a trader’s convictions.
After going over these above statistics it’s very obvious to tell why traders fail. More often than not trading decisions are not based on sound research or tested trading methods, but on emotions, the need for entertainment and the hope to make a million dollars in your Pocket. What traders always forget is that trading is a profession and requires skills that need to be developed over years. Therefore, be mindful about your trading decisions and the view you have on trading. Don’t expect to be a millionaire by the end of the year, but keep in mind the possibilities trading online has.