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.
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…
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.
To learn how to do it, read this complete guide.
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:
- How to use advanced risk multiple stats
- How to use the MaxR metric
- Why you should journal your missed trades too
- How to keep an effective trading journal
- Tips for making it easy to maintain a trading journal
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.
Start by writing down your trading plan.
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.
That's a fact.
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…