Reality Bites: 90% of Traders Fail. Do you want to know why?
There is always a price to pay for education. For some it may be losing several accounts, for others it may be hiring a good mentor to teach them; for others it’s the school of hard knocks and even living at the border of impoverished conditions in order to study the market, back testing and forward testing several trading strategies until finally developing their own trading methodology.
It took me many years and thousands of hours of market watching to develop my own trading methodology. I’m still refining it and I don’t know if I can ever just have one system in trading consistently. The baggage from my old “learnings” was so heavy that I was unable to trade successfully until I got rid of it.
I would estimate that, 80-90% of traders I’ve known are not consistently successful in the trading business. Think about what that means in terms of lost money, accumulated debt, dashed dreams, and disappointed family members. Why do no trading coaches talk about these personal tragedies and losses? Why don’t the stories of the vast majority of traders ever grace the pages of trading magazines and trading books?
I do not know why. Perhaps because they won’t sell well. Perhaps.
What I do know are the reasons why most traders fail, and if I can spare you of the common pitfalls, perhaps, you can start assessing and making proactive steps into becoming better than all the rest of us.
1.) Most traders never took the time to decide how they should trade
Most traders I know skipped the parts on learning about their own temperaments, their discipline issues, their execution performance levels and just go straight to learning about charts and fundamental research reports, without realizing they skipped the most important part- their own ability to psychologically execute the right market timing, and the discipline to cut when they’re proven wrong by the market, no matter the fundamental value of the company they’re trading upon.
While it may seem trivial to answer psychology questions to yourself, the reason why I find this most important is because knowing yourself determines your ability to follow your own system.
All traders echo that successful traders need to have a system, but how can you create a system for yourself that you can follow, no questions asked, without understanding your own personal capacity to follow rules? As a child, did you normally try to constantly challenge the status quo? How can you accept trading rules, when you’re told to follow only the price, and nothing more? How can one trade a system meant for day traders, when one’s inclinations are more rooted to analysis of companies, where position trading is more apt? How can you integrate your personal strengths and weaknesses in order to create a system which is successful, with a trading edge that can combat the markets, whether bull or bear?
Jeff Cooper once wrote this trading reality: “Hundreds if not thousands of books have been written about trade entry, but the important thing to understand is the personal psychology required to honor a protective stop and the discipline required to get out. “
In truth, traders never really can skip this lesson. Whenever one trades without any system, and not according to the right precepts of good market timing suited to one’s temperament and ability to execute that system, one has to pay for the education.
2.) Most traders fail because money as a motivation isn’t enough
Be honest with yourself and think about whether you are intrinsically motivated, or whether you are really only in it for the money.
Money is and remains a so-called extrinsic motivation, the level of which – in contrast to a person’s inner drive, their intrinsic motivation, cannot just continue to rise.
Implementing your strategies requires character traits such as iron discipline, indomitable will power and the patience of a saint.
It’s easy to think and say that you love trading and believe in your trading skills in order to achieve that great success, but making this vision a reality is a long and uphill struggle, as many of you well know.
Everyday you have to fight against being your own worst enemy. Everyday you put your wallet on the table and need to be mentally able to deal with the changes to its weight. You will experience a roller coaster ride of emotions ranging from shouting in triumph at having achieved extraordinary profits to the feeling of being sunk in despair during severe drawdowns and long series of consecutive losses. The one thing you can depend on is that your love of trading will be severely tested by the markets. If money is the only reason why you’re in the markets, consider a different business. If you think it’s not a business, you’ll be closing your shop soon anyway.
3.) Most traders fail because of the lack of patience
Every time you have the urge to make an aggressive trade, especially out of emotion, take a step back and reevaluate. The moment you get impatient, bad things tend to follow. In tough markets, stay patient and let others beat themselves in order to be ready and fully prepared to pick up the low lying fruit from the sheer destruction and capitulation from others.
The willingness to wait for the right pitch will make all the difference between a successful trader, and a trader wannabe. If you are patient, the market has a way of painting its picture for you. The essence of a good trader is to wait for your pitch, your ball.
4.) Most traders fail to keep and study their journals
You can tell me that trading is a numbers game, but lip service is never going to be enough in the markets. Your journals and your trades are the only basis to see whether you have understood the concepts right. If you don’t even keep a journal, that’s even worse, because you cannot measure how you’re doing in your trading. That’s similar to opening a business, without even reporting how much sales and operating expenses went throughout the day.
If you think this is minor, so be it. The devil is always in the small details. Simple advice: Have a journal, study your hit ratios, your profits and your losses. Bottom line is, if you can’t study your mistakes, you will never see yourself,and will have a false sense of trading “eminence” which will be quickly disproved by your account performance. Don’t be surprised if perception is not the same as reality. You’ve been warned.
5.) Most traders fail because they still blame the markets
You may think I’m exaggerating but I’ve heard a lot of traders crucify the Dow for being down again for the eight or ninth week. Failing traders blame their losses for most anyone except themselves. Traders who never look at themselves are a hopeless basket case.
6.) Most traders fail because they believe the market is rigged and that they need inside information to benefit from it
I believe in saying that these are the same types of people who blame the world why their marriages have failed, why the prices of good keep on rising, why everything else is moving out, except themselves. These people aren’t going to get any better. If you’re one of these kinds of people, consider assessing why you complain so much about the world, but not do anything as simple as looking at your own self.
7.) Most traders fail because of their inability to understand the true concept of taking risks
There’s a difference as big as day and night between trading and gambling, but then again, even long time traders can’t distinguish both things. You’d understand what I mean, whenever I see a trader take a risk, whenever the reward’s measly. Whenever a trader chases a price point, and gets rewarded, one believes that one has made a good trade. The truth is, profits alone do not guarantee trading success for consistently long periods of time. Process trumps everything else in the long run.
Also, risk management isn’t just about keeping losses down; it also means taking maximum prudent advantage of opportunities that present themselves. Many traders fail because they can’t limit their risk. Many others fall short because they lack the courage of their convictions. Somewhere between confidence and overconfidence lies the sweet spot for successful traders.
8.) Traders fail because they confuse their cojones into their trading
In the business of trading, you’ve got to decide if you want to make money or if you want to be right. To trade what is and not what we think should be, requires us to experience the market as it really is. Successful traders know when to cut losses if necessary. Don’t let your own desire to succeed be the enemy of good judgment.
There is no harm in guessing wrong, the sin is in staying wrong.
9.) Traders fail when they think they need to be right all the time
As a trader, you can make a great living if only half of the setups you take are winners, sometimes even less than half. Dr Van Tharp once wrote that most of us grow up in an educational system that brainwashes us to think we have to get 94-100% correct to be excellent. If you can’t get at least 70% correct, you’re a failure. Mistakes are punished in school by ridicule and poor grades, yet its only through mistakes that we learn.
Indeed in the everyday real world, people have made millions on trading systems each with a reliability of only around 30-40%. This means that great traders have the resilience needed, and emotional maturity to weather the draw downs, and tough times when their systems yield consecutive cut losses. I’m sure you’ve heard this before but I’ll repeat the trader cliches. Yes. Trading truly is a numbers game.
10.) Traders fail when they forget there’s plenty of opportunities other than trading
Perhaps this is ironic, but I’m sure you’ve heard the trading mantras “Scared money never wins”. Every bet a trader does, once confused with many things such as tying up one’s own confidence capital, cojones other than the money involved normally loses. When you trade thinking that trading is the only avenue for your income, that’s when you will normally fail. Successful traders approach the markets without much emotional capital in every trade. Sometimes, successful traders do not even watch the screens. Less is more. You can just place your stops, put your position size and do anything you want such as exploring other markets (learning about private equity, venture capitalism, foreign markets, currencies, commodities or some other entrepreneurial endeavor that piques your interests). This may be counter intuitive, but trading while requiring hard work when it comes to preparation, is effortless when it comes to execution. Once you’ve entered the trade, the stops and the sizes, everything else is automated. You don’t have to worry about the intraday upticks and the downticks unless you are an intraday trader.
11.) Traders fail when have a false recognition that trading is a walk in the park, and is static
The market is constantly evolving and you need to be able to change with it. A good student of the markets studies continuously. Nicholas Darvas read hundreds of books before finding the system that best fit him, and he still continues to read even after trading millions successfully. He traded his box theory during the momentum markets very well, and kept on dancing during the market cycles he didn’t have a trading edge upon.
Successful traders know that no strategy works forever. At least no static strategy. You need to adapt your approach as the market changes. Some people think they can learn a couple of easy patterns and just trade using them the rest of their lives and they’ll be fine. If those patterns are adaptive somehow, then maybe. If they can work in calm markets and choppy markets and trendy markets and panicky markets then great. Perhaps you can use them forever.
People are easily attracted to fantasies, instead of realities. But no evil would be justified on the ground of expediency. It takes years to become a successful trader. There’s not much shortcuts in most every field, and trading is the same.
I’m sure I can list many other reasons why so many traders fail, but I’d leave the readers to simply write their own reasons why. What’s most important is that one recognizes why one fails, and actively tries to address and fix the reasons, in order not to fall in the same debilitating failures every single time. 🙂
Hope the outline above helps,
The Faceless Trader
Inspirational References: Books and articles authored by Jeff Cooper (Hit and Run Trading, Chap. 17) , Brett Steenbarger (Trader Feed) & Charles Kirk (Kirk Report) , Mustapha Azeez (“Trading Facts Can Set You Free”.Trader Mag.June 2011)