Underlying Causes of Trading Failure
So far we have looked at the main types of mistakes that cause so many traders to fail. Essentially what’s been covered is a series of bad decisions which result in losses most of the time. Your task as a “soon to be good trader” is to recognize when you are at the decision points and make easier to make agood decision. After enough practice making good decisions becomes automatic. To understand and recognize your decision points it’s helpful to know what’s motivating those decisions – the underlying causes of trading failure:
1. Unrealistic Expectations
It’s very hard to ignore the amazing claims from sales pages, seminars and slick sales people who sell big ticket training courses. You’ll see it time and again on forums where new people will come along and post up their trading plan that involves “starting with $5000 and making $1000 a month to start with”… That’s a 20% a month performance right off the bat for a complete beginner. Here are some numbers that should get you thinking:
The training course costs £13,000. The sales people on the course “assure” you that by starting with £5000 you can make back your £13000 and then some within 6 months... So what kind of performance do you need to achieve those kind of returns? To make a profit of over £13000 from a £5000 account…. Without compounding that’s more than 250% in 6 months – a trading performance of around 500% a year… Only 5% of retail traders manage to make anything above 0% which means it is very hard to make any money at all in this business. If you can make 2-5% a month then you’re doing very well indeed. So with that $5000 account and a 5% gain you’re looking at around $250 a month which you can reinvest and compound should you choose to do so. Expecting to turn a small amount of money into a large amount in a short period of time will make you over trade, break your rules and blow your account – period. People who enter this business thinking they can make lots of easy money very quickly with little to no effort get very rude awakening. Aim to be profitable on a demo, then replicate those results on a live account, then gradually build on your performance.
2. Lack of accountability
One problem people have is not being 100% accountable for their actions. When they get stopped out of a trade they’ll blame someone or something else – usually their broker, or someone on a forum who said something about something. Anyone else but themselves… There are some websites where you can read and post up reviews of brokers. It’s quite revealing to see how many people blame their brokers for their poor trading results. Even the good and reputable brokers get absolutely slammed and labeled as scammers by bad traders who refuse to accept responsibility for clicking buy and sell when they do. Do they blame their broker when they make a win?... By accepting accountability for every action you take you can then work on improving the actions you take and the decisions you make. This is Key !!
3. Not being prepared to put in any work
Many people come to trading because they think it’s easy. In fact I’d say that a large portion of the 95% of failed traders are people looking for get rich quick opportunities and are trying their hand at this one. They’ve probably tried MLM, online marketing, real estate (without any money to put in) and now this – with no success at anything. People jump from this to that looking for the easy/quick money and never get anywhere because as soon as they find out that whatever opportunity they are looking at involves work, time and effort they toss it out the window and look for the next one. As you’ve probably gathered so far, this business takes work. Difficult work that takes time to complete with some hard knocks along the way. To make it you have to be patient, disciplined, resilient and prepared to work on yourself.
4. Financial pressure
If you do not have disposable income that you can afford to lose do not trade with real money. If you think you can come along with your life savings, your child’s education money or take out a loan or credit card to fund your account stop immediately! Every now and again someone will come to a trading forum and make a post along the lines of “Please please help me. I’ve lost almost all of my family’s savings, I’m down to the last $250 from $25,000 and my wife doesn’t know. Please someone help me and tell me what to do, please give me a signal to trade off this is urgent. Please…” As you’ve learnt already the key to successful trading is being able to make good decisions and not give in to compulsions to gamble, over trade and throw your rules out the window. When you’re under financial pressure or trying to chase an aggressive money target (eg. make $x amount by a specific deadline) then thinking and acting objectively is a million times harder. Becoming a good trader is hard enough without pressure that will sabotage you and blow your account. If you’re in debt or undercapitalized then demo trade until you can fund a decent account.
Following on from the last point – trading pennies can be hard. Yes your broker will let you open a $500 or even smaller account but if you practice proper money management you’ll be risking $10 a trade and your profits will not be very exciting. The temptation to break your rules will be great – especially when a big move occurs or you see a ‘nobrainer’ set up. Trading a small account can be done but it’s much harder to stick to your rules. It can be better to stick to the demo a while longer and keep saving so that with a properly funded account you’ll think long and hard about risking 2%
6. Need for excitement
A lot of people view the financial markets as a fast moving white water roller coaster, and it can be that if you treat it that way. Amongst non-traders there is a belief that very short term day trading is the only method there is. When I explain to them that I trade forex and commodities on daily charts and hold positions for days and even weeks putting in less than an hour a day they glaze over. Not nearly exciting or glamorous enough... Sure you can choose to go into scalping the 5 minute charts and spend 10 hours a day stuck to your screen, or you can choose not to. Either way if you crave excitement then the markets and your money should not be how you get it. . When done well trading should be methodical, emotionless and very unexciting. If you want a glamorous, fast moving 'flying by the seat of your pants' activity go to a casino. The need for excitement and action is what causes over trading because you feel like you've got to be in the markets, got to have something to watch. Remember the freeway analogy, this is the equivalent of living on the freeway. There's nothing wrong with craving excitement, just don't use your trading business as the vehicle.
7. Following other people
This is tough for a beginner because you need to start out somewhere but after you've got your feet wet you will want to get into a position where you can develop and adapt your own system and trading plan. There are so many people on websites and Internet forums who just go looking for signals rather than become good traders themselves. Don't get me wrong there is a lot you can learn from forums and websites and some good people give out some great advice. Myobservation is that the best traders offer advice on how to spot your own signals rather than give them out. Good traders who do provide signals charge money for them. Becoming dependant on someone else for trading signals is something bad traders do. Also on Internet forums and websites the 95% bad traders like to voice their opinions and trade ideas as well. If you get too caught up in forums you can end up second guessing your own trade ideas because of what others are saying and they are very often wrong. Forums are great but take them with a pinch of salt and use them only as an educational tool.
8. A Need to be right
This when unchecked can wipe it your account if you let it. The human ego can be a very destructive thing. We all have one and I won't go into an in depth study of the ego here but suffice it to say the ego can be a trader's worst enemy. Some people would rather try and prove themselves right than take a loss on trade idea that is wrong. They will move their stop loss further away or remove it altogether to give a trade 'more room to turn around' all the way until they get a margin call. You see when a position goes against you far enough it becomes harder and harder to close it as more of your account gets drawn down. Ever been stuck in a bad trade that’s eating away at your account? That feeling of knowing that the best thing you should do is close it but as 60% of your account will be wiped it’s “unthinkable”………. ..all the way to the margin call where your broker takes 98% if your accoun. Having a need to be right and allowing it to make decisions for you will make you curve fit trade ideas, ignore what you don't want to see (like reversal signals that counter your original idea) and filter out vital information that does not support or contradicts your trade idea. This can be compounded even further if you've posted your idea on an Internet forum and are afraid you might publicly lose face. Trading is a numbers game. Sometimes you're right, and sometimes you're wrong. If you cannot accept being wrong then get out of this business immediately.
When things start going right it's easy to become cocky and overconfident. You might start questioning your money management and taking a bit more risk, start over trading and generally taking more risk. There's nothing more frustrating that making some good gains and then giving them all straight back again. It makes all that good trading a complete waste of time. It is quite a common phenomenon for traders to give back all their profits shortly after a good run and it's down to overconfidence which is easy to fall into when you're doing well. I'm not going to tell you to print this off and stick it on your screen because it annoys the hell out me when people tell me to do that. I will however share with you the only quote from anyone that I have stuck to my computer screen:
"Don't be a hero, don't have an ego. Always question yourself and your ability. Don't ever feel that you are very good. The second you do you are dead"
Paul Tudor Jones
When it comes to ego and confidence these are the rules the trading legends live by.
10. Fear, greed & fear of missing out
Fear, greed and fear of missing out are commonly cited as the main psychological and emotional stumbling blocks new and struggling traders face. Fear manifests itself when you pass on a good trade idea due to analysis paralysis, the opposite of over trading. Also when something happens that causes a big move against you fear can make you close a trade prematurely before it hits your stop. You can see this demonstrated whenever a negative news item is released and the markets sell off in panic mode. Greed doesn't need much explanation but it is what drives you to break your money management for a 'sure thing' set up. Also set profit targets too high and give yourself aggressive financial targets that just make you over trade and break your rules - especially when things start going wrong........ Fear of missing out is when you jump on a big move just because it is happening and is not a valid signal produced by your system. Many traders often do this when a large move happens only to catch the tail end and reversal of it then end up with a position going against them they have no idea what to do with.