Edition 7: The 2 Reasons Why 90% of Traders Fail
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There are many books written about this emotional trading phenomenon, and it's tricky to imagine the overwhelming emotional cycles until you've experienced it for yourself.
With that one major exclusion out of the way, let's look as purely the mechanical, tangible reasons why traders fail, beginning with number one. |
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1️⃣ Not having a diligent risk management strategy takes the cake for the #1 cause of failure among beginners.
In fact not only does it take the cake, but it takes the entire bakery, the baker, the flour, eggs, milk, and everything else in sight! ... Along with all your trading capital. Put short, get this right or I assure you, you're going blow your account. Remember our friends back in Edition 3: Confessions of a Serial Loser, the ones algo trading who didn't properly run any risk management strategy? They eventually ran to ruin from one MAJOR losing trade, wiping out their entire account, along with all their winnings. A fixed risk management strategy is key! |
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Want an obvious way to spot a beginner trader? Check the "lot size" of their recent positions. *Lot size = fancy name for how much capital you're allocating towards a position If their recent 5 positions showed: 1.00, 2.50, 1.50, 1.00, 2.00 To correctly position-size there's a calculation that takes place. Goal: To risk exactly 1.00% of your total account balance if the trade goes against the position. Problem: Variables
Solution: Input that data into a position size calculator, many brokers offer them with their platforms, and that will spit out the correct lot size. Failing to do so will result in the trader taking inconsistent wins & losses, and this lack of precision always leads to overtrading & over-leveraging which always ends badly. |
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2️⃣ Not allowing enough time for a strategies' profitable edge to play out.
Trading is a game of probability. Every profitable strategy has winning & losing streaks. A beginner trader's win-rate can typically be around 50-60%, and often time less than 50%. I covered this in a previous edition, many strategies have a negative win-rate, but over time are still profitable. Personally, my win-rate floats around 40%, but my RR is 1.8:1. As a reminder of what that means is the average loss I take a -1%, where my average winner is 1.8% profit. With these metrics, I do very well even though I lose more trades than I win. |
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