According to statistics, 85% of all traders lose everything within the first six months of trading. Those who are able to survive the first 6 months, end up trading near breakeven. While a very small percentage of those end up being profitable and are able to achieve the elusive dream of “trading for a living”.
So given those terrible odds, why do millions of people around the world turn to trading? Could be the idea of having flexible work hours with the freedom or trading from anywhere in the world? Or is it the idea of not having a boss to report to? Or is it the unlimited income potential? The answer is all of the above. These, along with many other reasons, lure people to attempt online trading.
Unfortunately, these hopes are soon dashed as they fall into the traps and pitfalls that so many would-be traders have been snared before them. In fact, there are five characteristics common to all losing traders; 1. Trading without a plan; 2. Lack of money management; 3. Overleveraging; 4. Overtrading; 5. Lack of knowledge and training.
Winston Churchill, the Prime Minister of Great Britain once said, “If you fail to plan, you plan to fail.” Whether you are a world leader trying to save people from disaster or if you are just taking a trip with your family across the country, a plan is your roadmap to achieve your goal or to reach your destination. Without one you are leaving your desired outcome to luck or chance both are not very good choices.
Many traders see a stock or a currency moving up and they immediately start buying but fail have a plan for getting out of the trade if it goes the wrong way. They also fail to determine trend direction or consult other market forces that could impact their trade. These individuals lack a system for determining the ideal trade setup and the trigger that would make them take action. Rather, they randomly buy and sell based on feeling and then rely on hopes and wishes to manage the trade.
The next reason that traders fail is the lack of good money management. Many traders treat the market as a high stakes poker game and go “all in” on a single trade hoping that they can get rich quick off of a big “homerun”. However, the financial markets are not a lottery. Traders fail to realize that statistically, by risking a small percentage of their account like 1 to 2% and only taking trades that can yield 2 to 4% or more that they can be wrong 60% of the time and still make money.
For example, let’s say we took a coin and created a betting game in which you win $2 for every “Heads” and lose $1 for every “Tails”. Now let’s flip the coin 10 times. Since the probability of the coins landing on heads or tails is 50%, you would win $10 for the heads but lose $5 for tails. You would net $5 out of 10 flips. How many times would you flip that coin if you had those kinds of odds? Losing traders don’t recognize this and risk too much on onetrade and then have no money left to allow the combination of statistics and compounding to work for them.
Another reason that traders lose is overleveraging their trading account. Just because the broker gives you 400:1 leverage does not mean that you need to use anywhere near that amount. Leverage is a double-edged sword that can magnify gains but can also magnify losses. Traders that have small accounts use leverage to control larger assets that they would ordinarily not be able to control. As long as the trade is going in your favor, leverage seems live a very good thing. However, when the trade turns against you just a little, you soon see how fast your account can “vaporize”.
Also, many traders lose because they overtrade. They may take several positions in different currencies and stocks at the same time. They lose track of the performance of each position and become confused. They may get in and out of trades because they are not sure which direction to trade. When they don’t have a clear plan, this makes matters even worse. Overtrading also includes devoting excessive time in front of the screen to the point of neglecting relationships with friends and family or even getting a good night’s rest!
Finally, many traders lose because they have had no formal quality trading education that is systematic. These individuals rely on YouTube videos, social media, broker provided education, and forums to educate themselves about trading.
While in fact, all they really have is a patchwork assortment of various strategies and teachings that may or may not work. Many people, who are new to trading, like the idea of “free” education that these sources can provide.
However, the hidden costs are the losses these traders make by basing their trading on these poor quality sources of information. Remember the old saying, “You get what you pay for”. These losses can add up to tens of thousands of dollars over time. Investing in quality education can break this vicious cycle of “hope and loss”
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Five Reasons Why Traders Consistently Lose
