Trading Failure Why 90% Of Traders Fail

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Why Traders Fail: 3 Major Failure Points to Avoid

Trading seems so easy. just follow the rules of a proven trading system. Then why do over 90% of traders fail? This post will show you why and more importantly. how to beat the odds.

By: Hugh Kimura | Updated: February 21, 2020

Why do most aspiring traders fail?

Studies show that over 90% of people who start trading will quit before they become consistently profitable.

That’s a huge failure rate!

My mission is to help you overcome the odds and become consistently profitable with your first trading strategy.

One of the first steps to becoming consistently profitable is to understand why most traders fail.

…then avoid doing those things.

In this short post, I’ll give you the three primary reasons and how you can avoid them.

1. Not Testing Before Trading Live

Most aspiring traders get all excited about the potential to make millions of dollars in their underwear and more importantly…the opportunity to tell their boss to put you know what…you know where.

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So they take a huge chunk of their savings and put into their trading account.

Then they take the first trading strategy video that they see on YouTube and start trading that strategy in their live account.

…and they wonder why they lose money.

  • Would you be able to play in the NBA if you just learned to shoot a basketball last week?
  • Would you be able to be a Formula 1 driver if you never drove karts as a kid?

The same goes for trading.

Luckily, it’s possible to become a consistently profitable trader in anywhere from a few months to a few years. You don’t need to have decades of practice.

However, if you want to become successful in a short period of time, you do have to test your strategies before you risk real money.

There are basically two types of testing…

Backtesting

This is not just for automated traders.

Manual/discretionary traders should backtest too.

Backtesting shows you what to expect from a strategy and gives you a database of trades to compare to your live trading results.

Beta Testing

Once you have a strategy that works well in backtesting, it’s time to do some beta trading, also known as forward testing.

There can be differences between backtesting and live trading conditions, so a beta test is essential to uncovering any blind spots.

Learn how to beta test in this complete guide.

Once you have a strategy that passes both tests, you will have much more confidence that your strategy will work with real money.

2. Not Reviewing Detailed Trade Metrics

Another reason that traders fail is because they do not keep an effective trading journal. Solutions like MyFxBook are not enough.

Keeping a journal may sound daunting, but it doesn’t have to be.

This is where a trading journal is essential to figuring out what you are doing wrong.

Keep metrics on your backtesting, beta trading and live trading. It doesn’t have to be complex, you can use a simple spreadsheet.

If you want more advanced trading metrics, use RazorJournal.

Here are a few blog posts that will help you keep more useful stats:

3. Not Focusing Enough on Trading Psychology

In my experience, trading is 80% psychology and only 20% strategy.

Most beginning traders focus 80% of their efforts on a trading strategy…and that’s a major reason why they fail.

If you still think that trading psychology is not important, then consider these 3 common trader downfalls…

Lack of Tenacity

Success in trading comes down to the ability to stick with the learning process until you are successful.

This means enduring the inevitable drawdowns and…sometimes blown accounts.

(But if you follow the tips in this post, you can almost eliminate your risk of a blown account)

Trading is not as easy as it seems.

Tenacity implies the use of force and will power. But ironically, the most important step to developing tenacity is actually forgiveness.

Read more about how forgiveness does that in this post.

Lack of Discipline

Do you follow your trading plan exactly?

Do you even have a trading plan?

Traders who follow their plans have an exponentially higher chance of being consistently profitable, compared to traders who trade the SWAG strategy.

Then track your results and find out if you are following that plan.

It can be easy to think that you are trading your plan…when you are not.

If you aren’t following your plan, then figure out why.

The reason is usually related to traumas from your past.

See what I mean here.

Lack of Humility

If you get cocky, the markets will put you in your place.

Cockiness usually occurs on a winning streak, or when traders first start out.

Remember that the markets are much bigger than you and they don’t care what you think.

Successful trading begins with identifying potentially profitable situations, but that’s only half of the equation.

The more important skill is to understand when you are wrong and to get out with only a small loss.

This post will help you figure out where to set your stop losses.

A lack of humility only leads to overtrading and blown-out accounts.

Final Thoughts on Why Traders Fail

So those are 3 of the most common failure points when learning to trade.

These steps sound simple, almost too simple. But they can actually be very challenging to implement.

You have everything you need to get started in this blog post.

To get more advanced help with the actions mentioned in this post, join the TraderEvo program.

If you have any other questions about why traders fail, leave your question in the comments below…

Trading Failure: Why 90% of Traders Fail

Trading failure is a common term that happens for any types of traders whether they choose to trade binary options or others. As a trader, you have to consistently make decisions based on the market movement, whether you are new or experienced.

Though we have mentioned the highest percentage in the title, it depends how new you are in the trading market. But the general statistic shows that almost 90% of traders lose their funds. However, the number could be higher or lower than our expectation.

Before that, it will be a smart move for you if you rethink your trading plan before placing a trade.

After one to one discussion with traders, we felt a need to dig more in-depth to explain reasons for trader’s failure. So, today, we will give you some pinpoint that you need to follow to make each trade profitable.

Trading Failure: Why 90% Of Traders Fail

Trading is not about being perfect, it’s a clear mindset. You can’t always predict the right asset price movement. But to be a successful trader, you have to sync perfectly with the market and learn how to generate profits from the most volatile condition.

I will share with you the 5 reasons why most traders lose their investment. Hopefully, this article will help you to prevent your money from draining out.

Am I Right Or I Am Right

What clicks on your mind after hearing the term “right trading assets”?

Choosing the right asset or trading instruments is a vital role for traders. Remember, it will increase your winning rate. But the burning question is, how do you choose the right instrument that likely suits you as a trader?

Here, you have to follow some tips before selecting an asset or asset pair. Except for binary trading, you need to choose a perfect spread and leverage level for other trading types. You also know the market scenario of a particular asset.

Mostly new traders do not bother to analyze the trading market every day before opening a position. They select an asset because it is on the top level of the trading list.

So, choose the asset type considering all things together.

Don’t Want To Learn More And More

Do not run behind the money without knowing how to generate it for a lifetime. Trading knowledge is a gatekeeper which ensures your profits. For being a trader, you need the money and a trading device. But for being a professional, you need proper education.

Moreover, you will find many intelligent people in this industry who has spent many years learning how to be a professional trader .

So, forget the fact that you only have to make money from trading. You need more knowledge than simply knowing when to buy and sell. So, learn the industry first.

Not An Uphill Battel

Trading analysis is the key element for traders. Technical analysis is a method of using market data with asset past and future price. At the same time, from the daily market analysis, you will get the price movement of the global market.

An economic calendar is one of your best friends. It shows you the scheduled news and events that are related to the trading market. However, novice traders sometimes forgot to check the economic calendar every morning. But under any market condition, you should know what your risk on every single trade.

Strategies Need To Be Clean

Trading strategies will make a trader over powerful if he or she can implement it properly. I tried to learn different trading strategies almost every day by thinking that these will make a better trader.

Eventually, it changes nothing. On the other hand, another group of traders try to fix one or two trading strategies. Usually, it is not hard to find trading strategies. It is wise to change the strategy based on trading time and asset.

Online sites and trading forums are the best places to find trading strategies. However, finding the best strategy that suits your personality is a different thing.

On the other hand, the right trading plan will show you the right direction. A trading plan covers everything from the entry to exit level. Most traders enter into the trading world without any trading plan.

So, try to make a plan and follow that in a regular basis.

Random Reinforcement: Why Most Traders Fail

Random Reinforcement: Using arbitrary events to qualify (or disqualify) a hypothesis or idea; attributing skill or lack of skill to an outcome that is unsystematic in nature; finding support for positive or negative behaviors from outcomes that are inconsistent in nature—like the financial markets.

One of the most interesting topics in trading, and really throughout many areas of life, is random reinforcement. Random reinforcement, as it relates to harmful trading practices, occurs when a trader attributes a random outcome to skill or lack of skill. The market occasionally rewards bad habits and punishes good habits because the market is so dynamic. It is especially negative if a new trader who wins a few trades, with absolutely no plan whatsoever, attributes this success to “intuition.” Random reinforcement can also hurt veteran traders who experience a string of losses and believe they no longer possess skill. (See also: Trading Psychology and Discipline.)

Random reinforcement can create long-term bad habits that are extremely hard to break. It is equivalent to gambling addicts who keep playing because they win just enough to keep them there, but of course they are losing their money over the long run. A successful card player may also experience a significant draw down, abandon his proven strategy and in doing so give his edge back to the house. (See also: 10 Cleaning Tips to Spruce Up Your Trading.)

How Random Reinforcement Affects Us

The concept of random reinforcement is hard to grasp for some traders, but understanding it can be the difference between actually improving as a trader or simply believing we are improving when we are not. The best way to understand this to go through a few examples.

[You are more likely to avoid the issue of random reinforcement if you consistently and meticulously incorporate the proper technical tools in your analysis. To learn more, check out the Technical Analysis course on the Investopedia Academy, which includes interactive content and real-world examples that can help you along the path to profitable trading.]

Example 1: Relying on Random

John is a new trader. He has a business background, watches the news and follows the stock market, but he has not traded personally. He feels he has a good handle on what it takes to be a good trader, but so far, he has not written any of these methods down. John has opened a trading account and believes his background knowledge will make him a profitable trader. Opening his charts for the first time, John see a default stock in the trading platform, and it is rising quickly. He quickly buys 200 shares without even thinking. The stock continues to rise while he makes lunch. After lunch, he comes back and sells his shares, making himself a $100 profit after fees. John makes another trade and ends up with a similar result. He is starting to feel that he is very good at this and that he must have a “knack” for trading.

In analyzing the situation, experienced traders will notice a few things that could lead to short-lived trading career for this trader. The main problem is that several successful trades are not a valid sampling for if a trader will be profitable over the long run. John, the trader in this case, needs to make sure that he does not fall into the trap of believing that his current methods, which are still very much untested, will bring him long-term success. The danger lies in refusing proper market guidance or methods, whether self created or provided by someone else, because this initial untested method is believed to be superior based on these preliminary trades. The trader can begin to think very strongly that, if it worked once, it can work most, or all, of the time. The markets will not reward erroneous thinking over the long run but may reward random and unplanned trades some of the time. (See also: 9 Tricks of the Successful Trader.)

In the next example, we will look at random reinforcement again, but from a different angle. This example pertains more to experienced traders, or traders who are coming to the market with a written down strategy or method that is back tested or proven to be profitable in live trading. It should be noted that not all methods that were successful in the past will continue to be, as we just found out in the previous example (on a small scale). But methods that have shown success in the past are more likely to provide a chance of profitability in the future than a method that is completely untested or has never been profitable over the long run.

Example 2: Abandoning Strategy

John has now been trading in the markets for some time. He realized that approaching the market without a well thought out, written down and well researched plan was a mistake. He has overcome the problems evident in the first example and now has a solid trading plan for approaching the markets. This method has worked well over the past two years, and he has made money.

John is now facing another problem. Despite past success with this plan, his method has now led him to nine consecutive losing trades, and he is starting to worry that his plan is no longer working. John therefore changes his plan for trading, as he feels his method is no longer valid. In doing so, John ends up trading a new untested method, possibly similar to when he started trading.

The problem in this example becomes evident when John abandons his method, which has been successful, in exchange for an unproven method. This could put John right back to the beginning, even after trading successfully in the markets for a number of years. (See also: Day Trading Strategies for Beginners.)

Why did this happen? John failed to realize that, while randomness can create winning streaks using a flawed trading method, randomness can also create a string of losses with an excellent trading plan. Therefore, it is very important to make sure a trading plan is not actually going to work anymore (was the original success random?) or determine if this could simply be a run of losses based on current market conditions that will soon pass.

All traders experience losses, and there is no definitive number of losing trades in a row that will tell a trader if his or her plan is no longer working. Each strategy is different, but we can learn to deal with randomness. (For more, see: 4 Key Elements to Create a Successful Trading Plan.)

What We Can Learn

Once we realize that randomness can create strings of losses in great trading plans and strings of profits in poor trading plans (and also scenarios that fall in between these examples), how do we adjust to trade profitably over the long term?

While each trading plan is different, each trader must have a written trading plan that outlines how he or she will trade. This plan should be well researched and lay out entries, exits and money management rules. In this way, the trader will know over the long run if the plan is flawed or successful. It is also extremely important to risk a very small percentage of capital on each trade; risk levels of each trade should be covered in the trading plan under the money management section. This gives leeway to the trader, as he or she will be able to withstand a string of losses and be less likely to make a premature change in the trading plan when it is not needed. (See also: Ten Steps to Building a Winning Trading Plan.)

The Bottom Line

The markets are extremely dynamic and in constant flux. This brings in an element of randomness that can create profits for unskilled traders and losses for skilled traders, and it happens all the time. A trader must also determine when a certain string of losses or profits can be attributed their skill and when it is random.

The only way to do this while you are learning is to approach the markets with a trading plan and risk a small percentage of capital on each trade. In this way, the trader can see how a method performs over the long run, in which randomness becomes less of a factor. It is also important to remember that even the best traders and trading methods experience strings of losses, and this is not reason to abandon the strategy. However, isolating why the method is no longer working may help lessen the extent of the losses when similar adverse conditions arise again. (See also: Financial Ratios Tutorial and Investing 101 Tutorial.)

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