Where Traders Go Wrong: 5 Reasons Why Traders Fail
I have found that traders usually fail for five primary reasons:-
1. Lack of trading skill
2. Lack of risk capital
3. Improper trading psychology
4. Lack of support
5. Lack of experience
1. Lack of Trading Skill
Usually new traders are so eager to make a killing in the market that they are just too impatient to learn how to trade before trying to trade. Basically, they either wing it, or think they know what they are doing without objectively determining their skill level.
If new traders can get the dollar signs out of their eyes and focus on developing their trading skills in a stress free, fun environment, they will be off to a good start. I encourage new traders to ‘paper trade’ first, so that they can practice their trading skills in a risk free and stress-less environment. My feeling is that if you cannot be profitable ‘paper trading’, then you will not be profitable trading in the real markets.
‘Paper trading’ is an excellent way to practice trading. Once you are consistently profitable paper trading over a period of time and you feel ready for the real markets, then try trading in the real markets. The key to properly using ‘paper trading’ effectively is to be sure you are consistently profitable; you will feel it when you are! If you do not feel it, then you are not ready to trade the real markets. Wait until you are ready. Do not deceive yourself here, this is very important.
If you feel ready and then trade the real markets and become unprofitable, then your problem is more than likely with your psychology. If this is happening to you, stop trading the real markets, and go back to paper trading and seek some help with how your psychology is negatively affecting your trading results.
The key here is to be persistent until you do have the skill to excel. It takes work along with time and patience, but with both it can be done.
2. Lack of Risk Capital
In order to be a successful trader, you want to create a stress free trading environment. To help do this, you need to be trading with risk free capital. By this I mean do not use money you cannot risk, like money for rent, food and to support your family needs this month!
It amazes me how many traders do this. It is a recipe for failure and possible disaster. Don’t do it! If you love trading, but lack the necessary funds to participate, wait! Instead, ‘paper trade’ and develop your trading skills so when you have the money to trade, you are ready.
3. Improper Trading Psychology
How do you know you have an improper trading psychology? Here are a few things to look out for:-
1. Feeling too much stress
2. Successful ‘paper trading’, but not successful when trading the real markets
3. Getting mad or too joyous, depending on your trading outcomes or results (excessive highs & lows)
4. Feeling fear
5. Can’t ‘pull the trigger’
6. Fail to exit trading positions at stop loss points
7. Exit trades to relieve anxiety
8. Impulsive trading, etc.
When ‘paper trading’, you are apt not to feel the psychological impacts of real trading. Thus, ‘paper trading’ will not generate most of the above psychological feelings. However, when making the transition from ‘paper trading’ to real trading, the psychological issue may be felt and have to be dealt with just like when you learned the skills of your trading system.
When you hear that trading is both an ‘art’ and a ‘science’, it often refers to the combination of psychology and feelings, with that of a technical trading approach.
In order to be successful, the psychology has to be mastered and managed.