It's well known that over 90% of traders fail at trading.
But why?
In my experience with learning to trade, working at a hedge fund and consulting with traders since 2007, the primary reasons that traders fail are a lack of a proven trading strategy, weak psychology and no accountability.
But there isn't just one reason that an individual isn't finding success, it's always a combination of reasons.
Here's a complete list and breakdown of all of the reasons that a large majority of people who start in trading never achieve their goals.
Lack of Education and Knowledge
Trading without a solid understanding of trading strategies, risk management, trading platforms and psychology often leads to failure.
The weird thing about trading is that it seems easy, so people don't take it seriously.
A common misconception among aspiring traders is that they can learn a trading strategy in a weekend and they will become successful.
They also think that they can just watch a YouTube video or buy one course and that's all they need.
The questions I get on my YouTube channel surprise me sometimes.
Some traders don't take the time to do some basic research on how trading works and they jump straight into live trading.
In reality, trading is one of the toughest professions in the world.
So traders need to study as much as possible and find out what really works before risking real money.
This means reading trading books, watching many YouTube videos and taking trading courses.
Not Backtesting a Trading Strategy
Education and knowledge are not enough.
I've met many traders who know a lot about trading.
But it's a purely academic knowledge.
They never take the time to backtest their trading strategies, so they jump from system to system because they don't understand the metrics of each strategy.
More importantly, many of them don't even know if the strategy actually has an edge or not!
That's like buying a home and not getting a home inspection.
A home inspector will usually know much more about what could go wrong with a home than the average homebuyer, who maybe buys 3 homes in their lifetime.
Isn't it a good idea to know what's wrong with the largest purchase you'll make in your life?
Of course.
Same thing goes for a trading strategy.
If a trader is going to risk their money and wants to make a consistent income from trading, it's vital that they know that the trading strategy actually works.
Backtesting a strategy also gives a trader the confidence to take real money trades.
Once a trader knows that their strategy has an edge, what their max drawdown is, and they have a set trading plan, they have a support system to rely on.
The final benefit of backtesting is practice.
After seeing many historical trades, a trader has experienced many variations of their entries and exits and will get better at spotting opportunities.
Like with any other skill, practice makes (almost) perfect.
Poor Trading Psychology
As I mentioned in the beginning, lot of aspiring traders believe that all they need is a profitable trading strategy to succeed in trading.
Nothing could be further from the truth.
In my experience, trading psychology is the most important factor in becoming a successful trader.
When a trader has the right mindset, they are able to overcome setbacks, find the best trading strategies for them and adapt to changing market conditions.
Without the right mindset, a trader will fall back on their default programming, which is almost always not well-suited for trading.
Humans are not built to be traders.
Our innate programming makes us fearful and greedy at exactly the wrong times.
If a trader is willing to work on his or her mindset, that will pay the biggest dividends in performance improvements.
I've written many articles on trading psychology, but I've personally realized the greatest gains by going beyond traditional methods.
The best tool in a trader's toolbox for improving their mindset is a trading journal.
They need to record their thoughts and emotions so they can reflect on them later and figure out ways to improve.
My favorite trading psychology book is Trading in the Zone, but these books have helped me a lot too.
Poor Risk Management
The next most important thing in trading is risk management.
Failure to manage risk effectively can result in significant losses.
Traders who over-leverage their positions or move their stop loss orders often suffer large drawdowns that can wipe out their entire account.
Solid risk management can take a trading strategy from decent to super profitable, just by tweaking a few settings.
Many traders overlook this part of their strategy and trade a strategy as they learned it, or they try to make it more profitable by increasing the risk.
Those can be recipes for disaster.
Focusing on risk management can lead to some of the biggest gains in performance, so it should be studied carefully.
Emotional Decision Making
Emotional responses such as fear, greed, and overconfidence can cloud judgment and lead to impulsive trading decisions.
Traders can never completely eliminate emotions, so they need to learn to mitigate negative ones and work with positive ones to find success.
Meditating before a trading session can help a trader calm down and get into the right mindset to trade.
But learning to manage one's emotions goes beyond just what they do before they trade.
If I had to summarize what it takes to control our emotions, it all comes down to detachment.
Many times, people become too attached to an outcome and that's what makes them emotional.
People can get too attached to outcomes that really have nothing to do with them, like who wins the World Cup or who wins some game show.
This often stems from not having their own identity and overcompensating by identifying with an external event or organization.
When traders can detach from the outcome of a trade, and their identity as a “Trader,” then they are less likely to become emotional and make bad decisions.
Lack of Discipline
Consistency is crucial to trading success.
Not necessarily consistent profits, but consistent actions.
The right consistent actions are what lead to consistent profits.
Traders who deviate from their trading strategies, abandon their trading plans, or fail to adhere to their risk management rules are very likely to experience failure.
Some traders have discipline naturally or by training.
Traders who do not have it have to practice it to attain the skill.
There's no shortcut or hack here, it's something that has to be worked on daily.
Failure to Adapt
The world is dynamic and constantly changing.
Traders who fail to adapt to new market conditions, evolving strategies, or technological advancements may struggle to remain profitable.
We all have that family member who tells the same story over and over.
They are stuck in a time loop, often reliving their glory days.
You'll notice that they are usually also very set in their ways and cannot adapt to new situations and ways of thinking.
That's the kiss of death for traders.
For example, imagine if some traders were still drawing charts by hand.
They would be wasting time by not using computers to speed up their analysis process.
On top of that, everyone who is using computers is coming up with strategies that could potentially make hand-drawer's strategies obsolete.
So while it's not helpful to keep jumping to the next new thing, it's essential to keep up with new advancements and changing market conditions.
Overtrading
Trading excessively, either by taking too many positions or trading with too large a position size, can increase transaction costs and destroy profits.
There's a misconception among aspiring traders that more trades will equal more profits.
In reality, it's usually the opposite.
A few well selected trades will always yield better results than a ton of mediocre or poorly chosen trades.
Other reasons for overtrading are:
- Overconfidence: Some traders may overestimate their abilities or underestimate market risks, leading them to believe that they can quickly recover losses through aggressive trading.
- FOMO (Fear of Missing Out): Fear of missing out on potential profit opportunities can cause traders to enter positions hastily without proper analysis or consideration of risk.
- Trading too many markets: If a trader tracks too many markets, they can get “shiny object syndrome” and take every single signal in every market they track. It's important to practice discretion here and be very selective so they don't have too much open risk and too many correlated trades.
An interesting study also found that men tend to overtrade more than women, and single men overtrade more than married men.
Revenge Trading
There's a tendency for traders to treat the market like another person.
Of course, that's ridiculous because the market is collection of many people from around the world.
But that's just what humans do.
And that's why traders fail.
So if a trader sees the market as a person, they can easily feel like that person has wronged them by causing them to lose money.
When that happens, some traders will want to get back at that “person” for their losses and they will take irrational trades.
Traders who are prone to thoughts of revenge have to guard against this bias by resolving their need to get revenge.
Understanding why they need to get revenge all the time is the first step to preventing this behavior.
Lottery Bias
Many traders treat trading like gambling.
They think that they will hit one big trade and that will solve all of their problems.
A common justification that I've heard for this is that a big win will erase all of their losses and finally allow them to trade “properly.”
What these traders fail to realize is that big wins require big risks and it only takes a few big risks to lose an entire account.
Another way that traders give into the lottery bias is by setting their stop losses too tight.
They think that they can set a tiny stop loss and make a big gain.
Sure, there are some traders who can successfully use a small stop loss.
But those are day traders or scalpers and most people are not compatible with a short-term trading method.
So traders have to evaluate if they are playing the lottery, or if they truly understand the market and are placing their trades accordingly.
Lack of Patience
Successful trading requires patience to wait for high-probability trading setups and backtested exits.
Impatient traders may enter trades prematurely or exit them too soon, missing out on potential profits.
Even if a trader has thoroughly backtested a strategy, there is always the temptation to take profits early.
The solution here is for a trader to go back to their backtesting results.
They should redo the test, but take profits early or enter trades that are not part of their trading plan.
When the results are compared, the course of action is usually very clear.
Wait for the best setups and see the trade through to the profit target.
Deviating from the plan will only cost the trader money.
Failure to Accept Losses
Losing trades are inevitable in trading.
There's no such thing as a no loss trading strategy.
Traders who refuse to accept losses and hold onto losing positions in the hope that they will turn profitable often incur larger losses.
Successful trading is all about:
- Having small losses and bigger winners
- Having small losses and small gains, but a high win rate
But not accepting a loss will usually lead to losses that are bigger than winners and make it impossible to make a net profit over time.
Inadequate Capitalization
Trading with insufficient capital can limit trading opportunities and increase the risk of margin calls or account blowouts.
Traders need to have adequate capitalization to withstand market fluctuations and cover losses.
Luckily, it has become much easier to get started in trading with a small amount of money.
In Forex, traders can get started with as little as $500 by trading nano lots.
But in other markets like futures, traders need a minimum of $25,000 to even get started.
So traders must understand the capitalization requirements of the markets they are trading if they want to have any chance of success.
On top of that, a trader cannot expect to make a full-time living with the minimum capital requirements.
For example, in Forex there's no way that a trader can make a living with a $500 account.
Same goes with a $25,000 futures account.
They have to practice good risk management and have a solid trading plan to build a small account to point that it will produce a significant income.
Lack of Understanding of Market Dynamics
Much like individual people, each market has its own personality.
There are different market dynamics, transaction structures and trader psychology that make each market unique.
So a trader cannot expect to use the same strategies successfully in one market and have those strategies work equally well in another market.
Traders must take the time to learn the nuances of each market and what works best in that market.
Lack of Accountability
Traders who fail to take responsibility for their trading decisions will not learn from their mistakes and improve their performance.
In all fairness, it's easier to be accountable to others than yourself.
Based on personal experience, I understand this very well.
Therefore, I've also found that it helps to have an accountability buddy or group that can give me an external perspective on my trading behavior.
An honest reflection of what I'm doing has helped me realize things that I didn't see or was avoiding.
Beyond that however, traders have to take radical responsibility for all of their results.
That means no more blaming the market, the broker or the computer for losses.
Even if a situation seems to be out of a trader's control, that trader is still responsible for having a backup plan or accounting for the unexpected.
Final Thoughts on Why Traders Fail
So those are all of the reasons why most traders fail at trading.
Each trader will face his or her own combination of the challenges above.
But proper awareness, time for reflection and a good trading journal will help any trader make the necessary improvements.
