Why traders fail

Alex has opened a trading account and believes background knowledge will make for profitable trading. Pulling up a price charts for the first time, Alex sees a pre-populated stock ticker listed by default in the trading platform, and the prices are rising quickly.

Alex quickly buys shares of the default stock without even thinking. The stock continues to rise while during lunch. Alex makes another trade and ends up with a similar result, starting to feel self-assured and having a "knack" for trading.

In analyzing the situation, experienced traders will notice a few things that could lead to a short-lived trading career for this trader. The main problem is that a handful of successful trades are not a valid sampling for if a trader will be profitable over the long run. Alex, the trader in this case, needs to make sure that they do not fall into the trap of believing that current methods, which are still very much untested, will bring 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. 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.

Alex has now been trading in the markets for some time, and realizes that approaching the market without a well-thought-out, written, and thoroughly-researched plan was a mistake. The early problems evident in the first example have been overcome and now a solid trading plan for approaching the markets is in place.

This new, disciplined method has worked well over the past two years, and has produced profits. Alex, however, is now facing another problem. Despite past success with this plan, the strategy has now led to nine consecutive losing trades, prompting worry that the plan is no longer working.

Alex therefore, hastily changes the trading plan, thinking that the prior method is no longer valid. In doing so, Alex ends up trading a new untested method, making similar missteps as in the early days. The problem in this example becomes evident when Alex abandons the tried and true method, which has indeed been successful, in exchange for an unproven method.

This could put Alex right back to the beginning, even after trading successfully in the markets for a number of years. Why did this happen? Alex 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? All traders experience losses, and there is no definitive number of losing trades in a row that will tell a trader if a plan is no longer working. Each strategy is different, but we can learn to deal with randomness. Having a solid trading plan and the discipline to follow it can minimize losers while maximizing winners.

Because of the variety of situations which can arise in the course of trading, a trader is well advised to include every possible trading scenario that can occur in their trading plan. In developing your system prior to your first trade, nothing is at risk. For this reason, you should be able to develop a trading strategy that is objective. Adhering to your objective strategy through self discipline is the only way to avoid this problem.

An example of an easily avoided mistake which tends to be made often involves not entering a stop-loss order immediately after entering into a position. Some traders that trade forex without stop-loss orders can see their accounts wiped-out on just one all too common currency spike. Trading without a reasonable risk assessment and management strategy can spell disaster in the highly leveraged game of the forex market.

With leverage ratios of up to for some accounts, a large sum of money can evaporate in what seems like an instant. In the U. Basically, the trader has already psychologically placed themselves at a disadvantage. They are now stressing over the growing amount of the loss as the account is put at risk. The trader eventually chokes on the growing loss and closes out the position near its worst point, only to see the market subsequently recover. They are devastated and so is their trading account.

They then typically sit on the sidelines licking their emotional wounds and watching the market make an equally strong recovery. Unfortunately, this scenario plays itself out far too often among forex traders that do not manage their risk with discipline and according to a strict trading plan. One guaranteed experience in the forex market is loss. If you are trading, you are guaranteed to lose on some of your trades. You need to have the capital to sustain those losses that will, at times, outweigh your gains.

This problem becomes even worse when traders make up for their lack of capital by using heavy leverage. Of course, all forex trading relies on leverage, but try to grow your capital so that decreasing leverage is required, or so that you can maintain backup liquidity. Taking too much risk in a single trade often occurs in the increasingly slim hopes of making back the lost funds in a bigger loss, again when the trader cannot control their emotions. Another reason why most forex traders fail is because they have established unrealistic targets and goals.

These impractical goals will either cause a person to take more risk than they should on individual trades, or they will encourage more trades than would be necessary within the bounds of a balanced and objective trading strategy. While taking on too much risk can prove disastrous to the forex trader, a high-risk aversion will limit a persons ability to take the necessary risks to be profitable and successful in the forex market.

Forex market trading is not for the faint of heart! If the broker that you chose does not have the skills, knowledge, and tools necessary to properly advise the new forex trader, the possibility of failure increases significantly. Read reviews of the most reputable brokers out there. Just as it is with any business, whether you are selling products or services, trading futures, or trading in the forex market, you need to know the business in order to be profitable.

Find or buy a forex trading course from a trustworthy source, and work through it completely. This will give you the education you need to properly prepare your own trading strategy, evaluate potential brokers, and help you to avoid the common causes for failure mentioned above.

Would you get your car serviced by someone who has done the same or would you allow your children to get on a bus if the driver has only read a book on how to drive? Gaining a university degree takes three to four years, or more, so you can get into your preferred profession.

Similarly, trading the stock market is a business and those attempting to create that business need to treat it like a profession. Failing to give it this sought of respect is a major reason why most traders fail to make money when trading the stock market.

To be an educated trader you need to combine a high level of knowledge with experience; otherwise, your probability of success over the longer term is very low.

No matter why you trade, learning to trade is the easy part; the hard part is understanding your psychology - because it's true, the nine inches between your ears will determine your success as a trader. If lack of knowledge is the main reason most traders fail, then psychology comes in a close second. A trader's attitude or psychology determines not only how they approach their trading, it also determines how they will approach the stock market.

The emotions of fear and greed drive traders and investors alike, and without the correct education these emotions are often amplified, which leads to costly mistakes. To highlight this, we receive many calls from people with no knowledge or experience wanting to learn how to trade Forex. When I ask why, they often say it is because they do not have much money but this is the exact reason why they should not be trading this market. The rationale of people who tell me they have very little money to invest but want to trade highly leveraged markets generally stems from greed.

Therefore, in their mind the desire for quick returns is worth the risk although, in saying that, they rarely, if ever, think about what they could lose. Sadly, while this is a romantic idea, it is a fallacy. And herein lies the challenge: if you do not have much money, you tend to be more emotionally attached to it and, as such, cannot afford to lose it. Therefore, if the trade goes the wrong way even slightly, the fear of losing kicks in strongly, which often results in poor decisions and losses.

Individuals then end up taking a micro view of the market by watching their trades daily or even intra-day, or, worse, they make their decisions based on the short-term market volatility. This leads to an even bigger sin of over trading, as individuals chase the market in an attempt to regain lost capital or profit. Did This Help You? If so, I would greatly appreciate it if you commented below and shared on Facebook.

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WANT TO WIN Most traders approach the markets with a mindset of winning, how much money they can make, and what is the best way to try and time getting into the market.