How To Stop The Bleeding - Why 95 Of All Traders Fail
I was in a trading forum the other day and a new trader asks the question, "Does anyone make money day trading?" What a great question! The fact is that 95% of all traders lose money. That's right...they blow their account out and never make money. Quite shocking, isn't it? But if the above statement is true, that means that 5% of traders do, in fact, make money. The question becomes, "Why do such a small percentage of traders in the vast universe of day trading make money?
Undercapitalized
It is true that you do need money to trade. How much is enough? For the beginning trader, more is better. There is going to be a certain amount of mistakes a beginning trader makes no matter how careful he or she is. Trading firms have margin minimums to help protect the trader (and the firms) from immediate disaster. My thinking is that those minimums are too small for the beginning trader.
Success In Another Profession
A good many traders come from a profession that they are already successful in. They come into the day trading world with a sense that they can do anything. And because they are already successful, they usually come into the trading game with a fair amount of money. Trading requires an entirely different skill set than most any endeavor in the world. Just because a person is successful in one aspect of their life, they may not be successful day trading. There have been documented cases of doctors, lawyers, or successful salespeople who did well in their chosen profession only to fail dismally day trading.
Instant Gratification
In our fast paced, get every thing you want without waiting, society, it stands to reason that anyone considering trading would come into it with the mind set that trading is easy and there is money to be made at the drop of a hat. That simply is not true. Trading requires a tremendous amount of dedication and screen time to become consistently profitable. Trading is not one of those things that can be mastered with little or no work.
Poor Money Management Techniques
Finally, poor money management techniques contribute to many traders inability to consistently make money. There have been many books written to cover this aspect of trading. The scope of this article is not to re-write those books but to point out that money management is much more than taking a trade and deciding where to place stops and limit orders. The real issue is how a trader deals with all of the influences a trader faces while in the trade. If a trade is up, do you move your stop? If so, when, and by how much? If your trade is approaching a critical resistance area, do you cut the trade short? There are so many different ways to manage the same trade. How a trader manages the trade will, to a great degree, determine if the trader is profitable.
In summary, these are just a few reasons why most traders fail. The best thing for the new trader is to come to the table with few, if any, pre-conceived ideas about trading. Then develop the necessary skill set specifically designed for trading. Those skills can be honed by studying, screen time and reading books that help the trader to have the proper mindset. Is it difficult to accomplish? Yes! But the rewards are well worth the effort.