According to research more than 90% of traders lose money. The accuracy of this has not been established, however, it's a fact that more traders lose than win. Here are a few reasons why traders lose.
· Not understanding the mechanics behind fluctuations in share prices
Most people fail to understand that in a bull market, or an uptrend, share prices do not rise every day. Similarly in a bear market, or a downtrend, share prices do not fall every day. Not fully understanding this concepts make people panic and sell a profitable position during a bull market. It also pushes people to buy shares during a bear market. Successful traders and investors understand that a temporary fall in price during a bull market might be a pullback, not necessarily a reversal. They understand that they have to be able to sit tight until there indicators give a reversal signal.
· Trying to keep track of too many markets.
Most private traders try to keep track of too many markets, e.g., stocks, commodities, Forex etc. The danger of doing this is that the person is unable to focus. According to Warren Buffet," If you have a harem of 40 women, you never get to know any of them very well." Even professionals working for top investment banks or hedge funds tend to focus on a few sectors or industries. For example, an analyst that covers the Energy sector is unlikely to cover the Telecoms sector. You need to select a few sectors and a set number of stocks and track your selection on a regular basis. If one of the stocks in your selection is forming a pattern and looks like it might be a potential trade, then add that stock to your watch list and track it regularly. If you don't do this, you would find out that you are missing so many trades that could have been profitable.
· Inability to keep emotions separate from trading.
Trading and emotions don't mix. Greed, fear and pride would lead to substantial loses.
· Unmanaged Expectations
Most people start trading because they have been told that it is the easiest route to becoming a millionaire, or because they have been told that on completion of a one day course, they can start making £500 a day without much effort. Even though £500 per day is achievable, it is not what you would make as a beginner. It would take time and going through a process to achieve this figure, especially if you are a private trader and you only trade part time. Apart from that, most courses and advertisements don't tell people how much capital they would need to be able to make £500 per day. Using a reward to risk ratio of 3:1, you would have to risk around £170 to make a £500 profit. If you use my recommendations on the maximum risk per trade, then you would need to have an account size of at least £3,400 to be able to take the trade.
· Trading without a plan
Most private traders trade without a trading plan. This means that they are gambling and just hoping that things work out in their favour. This is the wrong way to go about trading. According to Victor Hugo, "He who every morning plans the transactions of the day and follows that plan, carries a thread that will guide him through the labyrinth of the most busy life." Having a properly documented plan for every trade would reduce the number of unplanned trades and increase your potential to succeed.
· Not identifying and addressing individual weaknesses
The reason most traders fail is not a lack of methodology, but because they fail to address certain habits or psychological issues that are detrimental to trading. According to Jesse Livermore, "A trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the outside public as well as the limitations of his brokers, must also know himself and provide against his own weaknesses." As human beings, we find it difficult to admit our weaknesses and this is one characteristic that we take into trading. Unfortunately, to succeed as a trader you have to be able to analyse your behaviour and response to the various situations that you are presented. You have to identify your weaknesses and protect yourself from them. There is a saying that goes "we have known the enemy and the enemy is us". In trading, you are your own enemy, not your broker, not the market, not the external forces. According to Rob Gilbert "First we form habits, then they form us. Conquer your bad habits or they will conquer you".
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