Last Updated on 11 September, 2023 by Samuelsson
If you have been researching trading-related topics for some time, it’s very likely that you’ve heard the statistic that 90 percent of traders, or even more, fail in trading and lose money. According to the same statistic, only some 10% of all traders make money consistently, while a 10% break even.
While the exact number may not be completely correct – it may even be so that an even larger share of traders lose money – the fact remains that nearly all traders fail long term.
The biggest reasons why traders fail usually are that they lack an edge and don’t have a trading plan. However, there are several more reasons that could play either a big or small role in determining the failure rate of traders. Some of these include psychological aspects as well as poor money management.
In this article, we’ll look at the biggest reasons why traders fail, and what you can do to increase your chances of becoming a profitable trader. You’ll also discover what trading style you should choose to maximize your chances of not falling into the losing category.
Reason 1: Not Having a Trading Plan
Trading is an endeavor that requires a long term outlook and a solid action plan. It’s necessary that you know in advance what you’re going to trade, when you’re going to trade, and what you’re going to trade. Otherwise, you won’t have a general direction and will find yourself switching methodology, market, and strategy all the time, which will have devastating effects on your trading performance. In trading, consistency is key to success, provided that your methodology works.
Here are some of the things you should make clear in your trading plan before placing any trades:
What type of trading concept should you focus on? Are you going for a trend following or mean reversion approach, or some other less common trading style? It’s essential that you decide this first since you’ll benefit a lot from learning the trading styles one at a time.
What timeframe are you going to trade? Different market timeframes vary a lot in terms of characteristics and trading performance, and as a new trader, you’re better off learning to trade one timeframe than jumping from one timeframe to another. The best timeframe to start with, according to us, is the daily timeframe.
What securities are you going to trade? Most people start trading stocks, and although all stocks may seem the same, there are some important differences you should be aware of. The most significant difference is perhaps that between “regular stocks” and penny stocks, where the latter should be avoided. You may read more about penny stocks and the associated dangers in our article on penny stocks.
Now, a trading plan is good to have, but it’s worthless if you don’t have an edge…
Reason 2: Not Having an Edge
According to us, this is the single biggest reason why most traders fail.
In order to be a successful trader, you must have some sort of advantage in the market. You must now that after you enter a trade, it’s more probable that the market goes in your direction than the opposite.
While this might seem obvious, it’s actually not. Many traders are unaware that the strategies they use to trade their money don’t have an edge or a real advantage in the market. The fact is that most technical analysis out there doesn’t work in its pure form, but must be massaged and tweaked into something that goes well with your particular market. Most market movements are random and cannot be used for any meaningful analysis, and as a trader, your goal is to separate the wheat from the chaff to find those trading strategies that work.
If you want to read more about our process of building trading strategies, we have an extensive guide on how to build a trading strategy that might interest you!
Reason 3: Being Undisciplined
For those traders who do have a real edge, this is one of the most common reasons behind trading failures.
It’s all very simple. You need to take the trades that are signaled by your trading strategy, regardless of what you believe about the current market conditions and where you are with your trading.
This may indeed be very hard, and many traders, including ourselves, struggle with this sometimes. It’s tempting to take an extra trade, or perhaps skip some trades that don’t seem that promising.
However, the one thing you should be concerned with as a trader is to not stray away from your trading strategy rules. The edge doesn’t lie in your discretionary decisions, but in the proven framework which is your trading strategy.
The point at which most people struggle with adhering to their set rules is when they’re in a drawdown. Following the rules of a trading strategy might be easy as you’re making new equity highs. However, the story shifts completely when you’re finding yourself in a deep drawdown that starts to have its mental toll on you!
Reason 4: Too Big Position Size
So, insinuate that you have a trading strategy with an edge and the stamina to take all the trades it signals. Now nothing could go wrong right?
Well, it’s not that simple.
Even a trader who has a working strategy and manages to place all the trades right could become a losing trader if he sizes his trades too heavily, and gets wiped out during a streak of losing trades.
To make this clearer, let’s say that you’re trading a strategy and risking 2% of your capital on each trade. This means that you would be into a 20% drawdown if you got a losing streak of 10 trades. This is perfectly manageable and represents a sensible risk level.
Now, instead, imagine that you risk 10% on each trade. In that case, the same losing streak would have wiped you out completely.
One of the biggest challenges that we face as traders is to strike a balance between risk and return. On the one hand, if you risk too much, you might be wiped out completely. On the other, if you risk too little, your returns won’t be worth the effort.
Reason 5: Random Reinforcement
Random reinforcement is something that we experience not only in trading but in most areas of life. In short, it means that we attribute a certain outcome to proficiency or lack of proficiency, whereas the outcome might only have been the result of sheer luck, and nothing else.
In trading, random reinforcement can result in habits that build up over long periods of time, which are very hard to break.
The traders that are hurt the most by random reinforcement in the markets, generally are those who act on intuition. These traders will inevitably get a few winning streaks, despite their lack of any edge, and will ascribe their success to “intuition”. As a result, many will start to risk more on each trade to make more money, which only will make them incur more losses as their random winning streak comes to an end.
While random reinforcement may be most noticeable among newcomers to the markets, it’s important to recognize that even experienced traders fall for this mistake from time to time. Even those with a profitable trading system will experience losing streaks from time to time, and during those periods, you need to realize that a good trade isn’t one that ended with a profit. Instead, it’s one that was carried out in accordance with your set strategy rules.
Dont miss: Best Swing Trade Stocks
Reason 6: Not Recognizing that Markets Change
Many new traders believe that if they only find the one strategy that works for them, then they’ll be set for the rest of their trading career.
The thing is that no trading strategy will survive forever. Markes constantly change, and as your strategies fall out of sync with the markets, you’ll have to abandon old concepts that don’t work that well anymore.
This also means that you must be ready to replace those strategies that stop working, not to be left with nothing to trade.
Another critical thing to keep in mind is that you need to know when to switch a trading strategy off in order to cut your losses early. We recommend that you use a trading journal and log your trades, so that you may identify strategies that start to degrade significantly and might have to be switched off.
This nicely brings us to the next point on the list, which is not keeping a trading journal.
Reason 7: Not Keeping a Trading Journal
Although you might not recognize it as you’re beginning to trade, keeping a trading journal is essential to your success as a trader. Having things like your mistakes, trading performance, and other trading related metrics easily accessible is essential to be able to identify areas for improvements.
Here are some of the things you should consider including in a trading journal:
- Name of security
- Number of shares/Total investment
- Description of trading signals
- Description of the entry and exit signals
- Stops used and reasoning behind them
- Total gain/loss from the trade
If you’d like to know more about trading journals, we recommend our article on the 10 benefits of using a trading journal.
Reason 8: Having Unrealistic Expectations
The internet is littered with fake trading gurus who tell you that returns of several hundred percent, or even a thousand percent on an annual basis are possible and easy to achieve.
Now, while we understand that it’s tempting to fall for these kinds of statements, achieving these kinds of returns on a consistent basis is not possible, even for the best traders out there. This means that some traders who actually are successful don’t understand that their returns are great, and as a result, they quit a profitable trading venture.
Reason 9: Not Coping With the Psychological Pressure
At first glance, trading may seem like an easy way to make money. You simply build a trading strategy and then execute the signals that it provides, and before you know it, you’ve made money.
The above reasoning may hold correct during those times that everything goes well, and your account just surges day by day. In such scenarios, trading indeed is a joy, and everything feels wonderful. Failing as a trader, in the sense that you don’t take the trades that your strategy signals, is not an issue. On the contrary, you’ll have to exert self-control not to become overconfident and start inflating your position size.
Now, things are not nearly as easy when you’re in a deep and prolonged drawdown that never seems to end. Even though most people understand on a rational level that drawdowns are inevitable and part of trading, it’s not uncommon to see people start behaving irrationally in a futile attempt to recover or prevent losses. For instance, it’s common to see that some people:
- Don’t take the trades that their strategy signals since they believe they too will end in losses.
- Attempt to take trades that are not signaled by their trading strategy.
- Let losing trades run, since they believe that the market will turn around if it’s just given some more time.
- Cut winning trades too soon, in order to lock in profits and at least make some money.
All four points above will have nothing but adverse effects on trading performance, and while you might say that you never would make those mistakes yourself, it’s hard not to when you’re experiencing a deep drawdown yourself!
Again, one of the best ways of remaining calm and focused during a significant drawdown is to keep a trading journal.
Reason 10: Not Putting in the Hard Work That’s Required
Too many traders believe that trading is easy, and that money can be made instantly in the markets.
As a result, trading has come to attract far too many venture seekers who just want the money, without the hard work.
Creating a trading strategy that’s worth trading and has a chance of lasting going forward takes many failed attempts and countless hours spent by the computer. We know this from first-hand experience since we’ve been designing and trading our own strategies for many years.
When we teach trading to our students, the difference between those who succeed and those who don’t is that some work harder than others.
Remember, as traders we’re always competing with everybody else who has access to the same charting platforms and technology as we have. Thus, to have some chance of winning the game, we simply need to work harder.
The Best Way to Avoid Becoming a Losing Trader
Having covered 10 reasons why most traders fail, we wanted to give some advice as to how you can avoid ending up as a losing trader. Although there are many factors involved, we think that there are a few tips that have a substantial impact on your chances of becoming a profitable trader!
Another good source about why traders fail: Why Day Traders Fail
Take a Trading Course
One of the best options to avoid failing as a trader is to take a trading course. That way you’ll get to learn validated methods that have worked well for other traders, and can avoid spending months, or even years doing the wrong things that never will bring any profits.
Just keep in mind that you NEVER should take the first and best option you stumble upon. Unfortunately, most trading vendors are outright scams and care for nothing but your money. That’s why you always should do your due diligence before enrolling in any course.
Some questions you should ask include:
- Is the trading vendor trading his or her own money?
- Are you, as a student, promised the holy grail in trading? If that’s the case, you can be almost completely sure that you’re dealing with a trading scam. Holy grails simply don’t exist in trading!
- Does the trading vendor promise incredible returns without any effort? If you hear these kinds of claims, shy away immediately!
Feel free to check out our trading courses, and of course, make sure to make your due diligence before trusting us as welll. We’re no exception from the rule!
Avoid Day Trading
We know that day trading is what most newcomers to the markets prefer to focus on. The promise of quick riches and fast-paced, exciting trading action, attracts a lot of people who want to make trading their full-time career.
However, what is not mentioned as often, is that day trading is one of the hardest trading forms to master.
In the stock market, most of the returns that we get over long periods of time don’t happen during the day, but in the form of overnight gaps. This is one of the reasons why day trading is much harder than other trading forms, like swing trading, where you’re helped by the positive gaps that occur during the night.
So, if you’re new to trading, we really recommend that you go with a trading form that’s easier, such as swing trading. This will drastically increase your chances of making money in the market, at the same time as it doesn’t require nearly as much of your valuable time!
Our complete guide to swing trading is the perfect resource to get started!
This is quite obvious, but worth repeating again and again.
Here at The Robust Trader, we’re not successful because we have some sort of unfair advantage. All the experience and knowledge we have today are the result of many years of hard work.
When things don’t go your way, be analytical and try to determine the root of the issue. You’ll learn so much from this, and although it’s incredibly frustrating, it will pay off in the long term.
So many people make trading seem easy, and not knowing that their view of it all isn’t true, can become very limiting in terms of the hard work that you’re willing to put in. After all, who wants to work hard when everybody else seems to make money with close to no effort at all!
We hope that this article covering the top 10 reasons why traders fail has provided not only insight into the main reasons that lead to trading failure, but also what you can do to maximize your chances of success.
For those who want to read more about how to become a successful trader, we recommend our complete guide to algorithmic trading, swing trading guide, or guide to day trading, depending on what trading form you’re the most interested in!
Here you can find our archive with all our swing trading articles.