Reasons Why Many Private Traders and Investors Fail

Saturday, October 31, 2009

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".

3 Easy Tips For Online Day Trading

Most of us would love to earn money in quick and easy way. For economic reasons, people are sensitive in their money. They want to make sure that they invest it correctly. They want to ensure profits in every investment. If you are one of them, you can do online day trading for your money. This is the fastest way to make money but there are still risks accompanied in this taking. Tips below would surely help you to make money on online day trading.

Look for a credible brokerage firm online. Not every one who says they are good broker doesn't guarantee that they can do well in your money. Remember, there are a lot of fraud brokers waiting for their prey online. So make sure you got the right one for you. Also this comes in evaluating the commissions being charge by each brokerage firms. Look for the company that can make you trade most of your money and not on paying their services.

Read articles about the successful stories of online day traders. In this way, you can learn from the true to life stories of online day traders. Surely, you can learn from their experiences.

Study the stock market and its movements. Through this, you can determine which stocks are good for you. You can also be well informed of the trends involve in the stock markets. You can sure to spend your money in profitable investments. Online trading can be very profitable if you will only employ common sense and use proven trading strategies.

5 Big Investing Mistakes to Avoid

As more and more people become interested in investing, financial planners and investment brokers are seeing an influx of first time investors. Unfortunately, they often don't see these first timers until after they have made a serious investing mistake, and are looking for help in getting some of their money back. For those looking into investing for the first time, here are five common mistakes that if known about, can easily be avoided.

1) The first common mistake in the investment world is not investing. There are plenty of safe investment options, from CDs to interest bearing savings accounts, and there is no excuse for not taking advantage of these safe and easy investment options. Fear can be a useful ally in keeping us safe in life, but standing still isn't always the safe answer in this day and age.

2) If not investing is the first, most common mistake, the second most common mistake is investing before your financial situation is ready. Before investing in anything, it's important to pay off high interest loans and credit cards. The first rule of financial management is to clear your debts, always make this your first priority.

It's hard to invest a decent amount of money when you are paying off other outstanding loans, not to mention stupid. Once you have a decent amount of extra money each month, save enough to support your family and pay your bills for at least three months. This way, if you happen to lose all of your money in a bad investment, you are financially prepared to weather the results. Never gamble money you can't afford to lose.

3) A third common mistake is investing with the wrong mind set. Investing in order to make money quickly is a bad idea, as many first time investors lack knowledge of and experience in high-risk, short term investments. Unless you are experienced in this type of investing, and have money to lose, you will most likely lose the money you put in. And remember that a lot of experts still slip up through occasionally allowing the wrong mindset.

A good mind set to have when entering the investment arena is thinking long term. Allowing your money to grow over a longer period of time, with less risky investments, is the ideal way to reach financial goals such as retirement and college educations for children.

4) It's also a wise idea not to put all of your money into one type of investment. This is a common rookie mistake, and can lead to investors losing all of the money they invested. Rather, divide your money among a variety of investment types, and keep an eye on it. This way, if one investment goes south, you still have money in other investments.

5) Finally, if you are serious about investments that will truly pay off, avoid investing in collectibles. As many people can now tell you, collecting Beanie Babies proved to be bust! For the most part, collectibles should be looked at as a hobby, rather than as something to fund retirement plans.

Stop Loss Order

The Use of Protective Stops

I cannot emphasise enough the importance of using stop losses in your trading. Market movement in your predicted direction can and will go wrong when least expected, this is where a protective stop or as is known in the trading circles "stop loss" comes in.

Placing a stop is an art in itself and many traders consider this to be a personal thing, though many trading manuals dictate the maximum that you should be prepared to loose from your trading account, this however is not a precise science, there must be some flexibility combined with a common sense approach.

The reason for this is that your analysis could be 100% spot on, but if the stop placed is too tight you will be taken out of the market prematurely, leaving you in the side lines, while the market and price takes off in your predicted direction without you on board.

This however does not mean that you must place a stop so far out that your trading account gets very badly dented. If you think this might be the case, then good advise would dictate that you let the trade pass, there will always be another.

The trick is to find a "trade off" when setting the stop loss, if the trade goes sour, then you should only loose a small amount, too tight or too close could result in your position getting liquidated by a price swing.

Stop losses can not be made rigid as different markets and instruments traded can and do vary in their volatility, the more volatile the price movement the more flexible must be the stop loss placement.

Once a stop is placed it must not be moved to accommodate a loosing trade, a stop must only be moved or trailed to lock in profits.

Stop Loss - An Important Aspect of Day Trading

Stop loss is an important aspect of day trading. Let us discuss the meaning of it.

It is a mechanism by which a trader can determine the amount of loss he is ready to undertake in case of a day trade. Let us discuss it with an example.

Let us assume that Mr. Smith is buying 100 units of stock X at the rate of 50. He has decided to sell of the units if the price of them falls below 48. So in this case, he can choose 48 as a stop loss. If he inputs the particular amount as a stop loss for his trade in his trader terminal, all his stocks will get automatically sold when the unit price of his shares will reach 40.

Today trading or day trade is done through computers and trader terminals. Every terminal has a box to set it up. Any person can input his target in the said box.

Trading is subjected to market volatility. Thus there may be condition when a stop loss may fail to get triggered if the amount of trade done is very high. It may not be possible to sell huge volumes of stock if the fall in the price is too sharp or too fast.

It can also fail to get triggered due to machine or technical failure.

It is important as it helps to minimize the loss of capital and maximize the chances of capital protection.

Thus it is a very important part of day trading as money saved from being wasted is always equivalent to the amount of wealth earned.

Trading System That Can Trade All Markets

Developing a good trading system is not easy. If you are looking for an ultimate trading system that can trade all markets like stocks, forex, futures, options, bonds, commodities etfs then read this article. Professional traders take many years to develop a winning system. Experienced traders know this fact that money keeps on flowing from one market to another. So in order to make a fortune, you need to follow the trail of hot money. For this you need a universal system that can trade different markets. A system needs to be tested a lot under different market conditions and its statistics compared with other trading systems before a trader can feel satisfied with the results.

One can develop a stock trading system that can swing trade or day trade stocks overtime. One can also develop a forex trading system that can swing trade or day trade the currency markets. But can you develop a system that can trade all types of markets like stocks, forex, futures, options, commodities, bonds, etfs?

It will take a lot of experience trading different markets over the years to develop such a universal system. Technical analysis fundamentals are the same for almost all the markets. It is in the use of technical indicators that difference comes.

For example, in forex trading, the group of technical indicators that give you the best system might be totally different from those that are best for trading crude oil futures or gold futures. Similarly, something that works in the forex market may not work in the stock market.

So how do you go about designing a universal trading system that can successfully trade all markets? Difficult tast but Mark Soberman, the President of Netpicks has developed such a system. His High Velocity Market Master system can day trade or swing trade stocks, forex, futures, options, bonds, commodities, etfs and he is willing to disclose the details of his system.

The Problem is Simple - No One Taught Us How to Make Money

Like a lot of people, I have a college education. Years ago I planned a career in corporate America and live the middle class American dream. I was lucky, I fell into the trading business and learned about money. It wasn't on purpose, I didn't suddenly decide that being a trader was a great idea...the job was offered to me.

During one the current recession, I have made one very interesting observation about the US population. We don't have the slightest idea on how to make money efficiently with a level of low risk. We've forgotten the principle of the American dream. It's shocking

I have a friend who is a university professor and has found his salary cut back drastically and has decided he is going to start a restaurant. Of course, it will take all of his savings and a hefty loan from a banking friend to finance his operation, and then there is the problem of running a successful restaurant. He knows nothing about restaurants, or making money, but a restaurant was the best idea he could come up with. And he is going to risk his life savings and mortgage his future on a bet that he can make the thing work out. I hope he does...

What's wrong with this picture? We are a country of technology and education, but the true sense of entrepreneurship we enjoyed in the past is fading.

Do you have a Plan B? Sure, you can sell some fruity health drinks that promise everlasting life, sell berries to lose weight, or pester your friends to death with the latest MLM opportunity, complete with ads of successful MLMer's driving Ferrari's and living in mansions. I think anyone who has every been involved in an MLM knows how the story usually works out. It ain't pretty, or cheap.

What wrong with learning a skill specifically designed to make money?

This is the point where I become completely baffled. I trade, all I do is try to make money. I don't try to sell anyone, and my income is is not dependent on someone else buying the latest gizmo I am trying to hawk. I have a distinct and specialized skill that is easily taught and readily learned and yet this business is often ignored. Oh, some people might look into it a little bit, and usually get frustrated with the terminology or the fact that it may take a bit of learning, time and practice to get good. But once you got it, baby, you become a money making machine. A goose that lays golden eggs, yet few people will take the time to learn this relatively easy skill.

In my opinion, most people know more about their lawn than they do their money, and this recession is eating away the money they have.

It doesn't have to be that way. I just don't understand.