Day Trading & ScalpingPsychologySwing & Position Trading

Real Reasons Most Traders Lose Money When Day Or Swing Trading

There are personal and psychological reasons most traders lose money, but there are also systematic ones. Not everyone can win, so traders without refined processes and mental strength will become the ones that lose.

Most people who attempt trading indeed lose money. When I worked at a proprietary trading firm people were regularly brought in for training, provided with capital to trade, and on the whole 96% of them washed out, usually within several months. The profitable traders easily made up for all the losses of this much bigger losing group.

European brokers have to report how many of their clients lose money. So you will often see a caption on their website like: “73% of traders lose money with this broker.” These stats are meant to show that trading is difficult, but the statistic is low and inaccurate. This percentage is how many active accounts are losing money. It does not reflect accounts that are closed because the trader lost everything or, those who lost money, became dejected and withdrew their remaining balance.

If the brokers disclosed this the percentage would move up drastically. If they, for example, had to report how many accounts were opened in the last 5 years, and how many of those are/were unprofitable, I would estimate the numbers move up to that 95% failure rate region.

Real Reasons Traders Lose Money
There are a number of reasons traders lose money. Here’s the list, broken down into sections:

1) Systematic
2) Research / Practice / Time
3) Trading Related
4) Psychological

1) Systematic
Trading, like a sport, is a hierarchy. There are a few traders who make loads of money at the top, then there are people who make a lot, then people who make a living, people who make a little, people who break-even, people who lose, people who lose a lot and people who lose everything.

To be profitable, you need to climb above and be better than those breaking even. How high you climb is up to you. But because it is a hierarchy, not everyone can win. You need to be better than most traders out there, on average, to make money.

  • Think of trading like golf (or any sport), and being able to make money at it. Millions of people play golf, but only a few thousand, male and female, make good money playing on major tours around the world in any given year. Only a small subset of this make the really big money. Then there are many thousands who make a living playing on smaller tours, being pros at local golf clubs and driving ranges, and doing trick shots or long drive competitions. Then you have a bunch of part-time golfers who are really good and make some money off their friends and/or win scholarships. Then there are millions of others who just golf, and they range from horrible to good…but the golfers above are higher on the food chain. Trading works the same way. To make money at it, we need to work our way up the ladder. We need to better than most people out there…and we need to stay there. Sometimes we are brilliant on one trade, and make money, but unless we stay better, we start losing again. Golfers who were good, but are no longer good, don’t get to keep playing at the top level. We have to perform to stay there. Trading is the same way. We need to work our way up, be better than others in order to make money, and then we need to maintain that. If others get better on average, we need to get better as well, or we will lose ground. Successful trading is not a destination where we get to relax once we get there. We have to continually practice and train ourselves to maintain that level. If we start lacking discipline or patience or focus, others will overtake and push us down the food chain—we make less money or start losing. Just like any sport, we aren’t going to consistently make money at trading unless we are better than most of the people we are playing against.

Most traders will lose or make very little, in order to “pay” the profitable traders.

  • If a professional trader made $1 million last year, potentially thousands of small traders lost money or gave up profits to feed the pro’s profits. Other pros contributed to the gain as well, but on the whole, the other pros made more than they lost too. Think of a poker tournament with thousands of people. Most players will win some hands, and even the pros may lose a pot to a weak player every now again, but on the whole, the money slowly shifts to the stronger players. The money the strong players make has to come from somewhere, and it comes from weaker players. Weaker players will continue to give money to the stronger players in tournaments, until on the whole, the weaker player eventually (if ever) becomes better than most, and starts making more than they buy-in for. Trading is the same thing. Every trade we take provides an opportunity for ourselves and someone else. Poor decisions over many trades mean our money goes to people making better decisions (better strategies, better execution, etc). Good decisions mean more money flows to us because we took advantage of the opportunities other traders provided us with their trades/orders.

Profits are created when someone else loses money OR gives up profit. This means that you need to be better, on average, than other market participants, as discussed in the hierarchy above.

  • If you buy shares and make money, someone else sold you their shares allowing you to profit…they gave up that money to you. Without someone sacrificing those shares you never get the chance to profit. On the exit, you need someone to be there to sell to. Maybe you allow them to profit, or maybe you hand them a steaming bag of crap and they lose. Either way, on the way in and out, someone allowed you to profit or lose. And you allow others to profit or lose with your transactions. The person who does this better, over many trades, is profitable. The person on the losing side of more of these exchanges loses.
  • Not everyone can win. When you buy, others need to come in after you and be willing to pay higher prices for you to profit. This plays out on all time frames. If you buy and no one comes in after or the sellers are stronger and are willing to sell at lower prices, the price moves against you and you face a loss. Prices don’t move on their own. Buyers and sellers (individuals) push prices, creating losses and profits for those involved, and opportunities to win or lose for those about to get involved. For traders to profit they need to be better at capitalizing on those opportunities than others.
  • Pros regularly have losses, just like losing traders, but on average pros make better decisions. The pro held a little longer, squeezing out more profit, not allowing another trader into the position (had the pro sold, someone else would have had the opportunity to profit). Or the pro sold quickly, cut their loss, and handed off a weak trade to someone else. The pro grabs the last few shares as the price starts rising out of a pullback (on average, if that’s their strategy). Anyone buying after them gets in at a worse price and has slightly less profit potential. Since there are pros with all types of strategies for whatever the price does, there are pros everywhere beating less-experienced traders to the punch in terms of getting shares when things look good and using less experienced trader’s orders to get out when the tides turn.
    • I have heard the argument “But what about a highly liquid stock or forex pair? I can get in or out whenever I please. So how can anyone else beat me to the punch?” Correct, there are shares for maybe one or a few people at each price level (depending on how big of a trader they are), but there are thousands of people trading at any given moment. If your strategy tells you to get in at a specific price, there are only so many shares near that level. If you buy all of them, others can’t get in at the same price (at least not at that exact second). If many people wanted in at that level, only the fastest gets the shares (could be an order placed in advance…doesn’t mean you have to sit in front of your computer), and everyone else is left out. When you exit, you exit on the shares available. But if everyone wants out at once, the fastest traders get out first. Or better yet, the pros likely saw the danger and sold before the panic. As the selling continues the price drops and those that are slower to react get lower and lower prices. No matter the instrument, and no matter how much liquidity there is, it is always still about who makes better decisions, and who gets shares/contracts/lots at better prices for both buying selling. You have to be better than others at doing it.
    • The chart example shows this below. A massive amount of buyers created a price spike and allowed loads of prior buyers to sell and exit their position. The buyers allowed potentially big profits for the sellers. Had the buyers not stepped in, the price would not have risen and there would be no profit for anyone trying to sell. The buyers created a profit opportunity for the sellers. This is a simplified explanation, but there is a clear wealth transfer that occurs. Every transaction is an example of this. Over many trades, the results show who made better decisions. Also, consider that there were limited shares at each level as the price started to rise. Those that acted quickest got better prices. Those that reacted later bought at higher and higher prices, with reduced profit potential. Eventually, someone bought right at the top (and someone sold to them)…and no one followed them in. The race then starts the other way. Once the buyers started disappearing, people started selling (at lower prices to find willing buyers). The quickest sellers got out near the highs, and those that are slower got out lower and lower. NOT EVERYONE CAN SELL AT THE TOP. Those that got in earlier than most, and out earlier than most, fairly ok. Those that weren’t as quick lost money. Over many trades, this creates the hierarchy.
    • This chart also emphasizes the point that profits are only made if others follow you in. For the early buyers, they had followers. The higher the price went, fewer and fewer buyers followed them in. Eventually, sellers overwhelmed the buying interest, and the buyers backed off. They were willing to buy at lower prices, but no longer at higher prices.

Source: TradingView

The chart above looks like an extreme scenario. Yet, this is actually playing out every second of every day.

  • Every up and down gyration in every stock, currency pair, option, bond, and a contract is created by people buying and selling. There HAS TO BE people who got better prices and people who got worse prices, and then as the inevitable ups and downs continue there will be people who sell at better prices and at worse prices.
  • If you aren’t better than most at getting better prices than what other traders get on the way in and out, on average, then you won’t be a successful trader. I say “on average” because” every trader has lots of losing trades. We need to be good enough on the trades we win to overcome those losses (this is called risk/reward). We need to be better than others to be able to get in and out with a profit, on average, in this battle for prices (this where Stock Strategies or Forex Strategies come in). Most traders buy too late or too early, and sell too early or too late, thus handing over profit opportunities to others instead of capitalizing themselves. This is discussed more in the sections below. The financial market is one of the only places that no matter how much experience or money you have, and no matter where you come from or what you do in life, you can play with the pros as soon as you open an account and place a trade. That is pretty cool. It is also dangerous. Don’t assume the ease of opening an account and getting into the game equates to ease in winning. There are strong systematic forces that keep most traders in the losing column.

2) Research / Practice / Time
Most traders don’t put dedicated time into a method. Being a good trader takes at least 6 months for some, and a year or more for most. Expecting to put in at least several months of hard work will save many people from quitting too early…or losing all their profits if they happened to get lucky and start winning right away.

  • To be good at anything takes time. Most traders don’t put in enough time to become good. Most want-to-be-traders left the trading firm I worked at within a couple of months. People who ended being successful typically took AT LEAST 5 months before they started seeing profits consistently after that mark. Had people put in more time, they would have increased their chance of success…if they practiced correctly.
    • Aim to put in at least 6 months of dedicated daily practice and research into YOUR method of trading (reading the news, trading groups, or books isn’t research into YOUR method).
    • Really quick success is usually due to luck or very favorable market conditions (easy money). Most of 2020, for example, was the easiest money environment in a decade, and it lured in many new traders who believe trading is easy. Most of those profits will transition back into the pro’s pockets over time (although some of the new traders will join the ranks of the pros, and some pros may fail to adapt and lose or cease trading). Easy money circumstances don’t last too long—usually a year or less—and then the “lucky” people will need to spend 6 to 12 months (or more) figuring out how to really trade, which includes both making money and keeping it.

Unsuccessful traders read/watch random trading things and dabble in random strategies and call that research or practice. Call it what you want, but doing that won’t make you a better trader.

  • The time you put in needs to be focused on your method. General knowledge is not of much use to a trader beyond being able to banter with strangers about the market. I would rather hire a trader who knows how to trade one strategy really well (and is willing to put in the focused work to make that one strategy better) than hire an Ivy League Ph.D. who knows everything about the market, they know lots of general strategies and how indicators work…except they have never been able to actually make one strategy really profitable.

You can decide to trade anyway you like, but then you need to become better at it than most others. Unsuccessful traders never bother to do this.

  • If you decide you are only going to trade Triangle Breakouts, you need to look through hundreds of charts to see what conditions were present in the best breakouts. Then you need to see if those conditions were also present in the losers. Find conditions that exist more often in winning trades than losing trades. Define exactly how you will know what those conditions are, and how you will enter and exit. Do overall conditions (market indexes) affect the success of the patterns? Would a trailing stop loss work better than a profit target? If the triangle occurred within a trend, did that matter? Did the strength of the trend matter? Did the breakout direction in relation to the trend direction matter? Was there a way to make the stop loss smaller to improve profitability? Is there a pattern within the triangle that allows for a better entry point, or smaller risk, or bigger profit? Would waiting till after a false breakout aid profitability? All these questions don’t need to be answered at once. Just keep researching that strategy until you find parameters that create a profit over many trades. Then you can keep researching to improve profits, or you can trade with what you have, assuming it keeps working. Or you can add another strategy and go through the same process to increase profits. Most people don’t do THIS kind of research. They read a book or an article, or ask questions in forums, and consider that work. The real work is the stuff you don’t want to do. Boring stuff—comparing tiny variations of a strategy and discovering one variation that works just a tiny bit better than other variations. Others will say, for example, “Don’t trade triangle breakouts, you’ll lose money.” Yet, you will KNOW that with the right criteria you can make a lot of money trading them because you put in the work to find a way. THIS PROCESS APPLIES TO EVERY STRATEGY, AND EVERYTHING YOU READ.

We can do something every day and not get better at it. Think golf courses, tennis courts, the neighborhood basketball courts, maybe the bedroom, and so on. Practice doesn’t make perfect. Perfect practice simply creates improvement.

  • Most traders read a few books, learn a strategy online, and think that is all it takes. Not even close. Learning to trade even one strategy well can take months because we can’t just learn how to trade it, we also have to learn when to trade it, and when not to. Slight variations arise, and you need to learn what to do in those circumstances. You have to learn what your common mistakes are and find ways to correct them. When it comes to trading there are many things to practice, but most want-to-be-traders don’t practice. They just put in hours. There is a big difference. Here are things to specifically practice.
  • Create a trading plan and follow it. A trading plan is your rule book for trading, telling you explicitly and exactly when to get into and out of trades, how much to risk, when to trade, what markets to trade (see above on doing your OWN research). A good plan lays out everything you may come across. Creating one takes time; typically months, but for some, it may take a year or more. It takes months because each trader needs to see some different conditions, slight variations, and figure out what to do. No two trades or trading days are ever exactly alike. We need to develop rules that account for various trading conditions, but at the same time are precise.
    • Not having and not following a trading plan is a big reason most traders fail. People without a plan are making an assumption that they are smarter than people who do this for a living, and therefore they don’t need to prepare, plan, or practice. Wrong. If you believe you can easily and with little effort beat people who do something for a living, sign up to spar with a UFC fighter in your area.
  • Practice following a plan. It should be so easy, but it is not. If you don’t have a plan yet, while you work on it, find some simple trading rules and practice following them in a demo account. Even if the rules don’t make money, you do yourself a huge service simply by practicing following a plan. It is not time wasted. Put a winning plan in your hand and you have a much better chance of following it. Following a plan takes practice too. It is not natural for most people; think diets, workout plans, saving money, and so on. Practice following a plan. It is a skill. Without it, all the other work is for nothing.

3) Trading Related
The issues discussed in this section also relate to other sections and since they are often quoted as the reasons people fail, I will tackle them individually.

Here are some other trading related reasons traders fail.

  • Traders fail due to being undercapitalized. Sometimes the market is easier to trade and you make money right away. But usually, there is a learning curve which means losing some of your capital at the start. After that learning curve, you still need enough capital so that the risk on any single trade is small. You need enough capital to be able to position size properly and meet your goals. If you are undercapitalized, you can’t position size properly (in most markets) and you are more likely to lose your focus because the gains (in dollar terms) come too slowly. There is lots of money available in the market, but you need enough capital to trade effectively in order to make those good returns with a risk-controlled strategy.

If you have a plan, follow it. Anytime we don’t follow our plan, that is a mistake, whether money was lost or not. Yet even when trying to follow a plan, traders make mistakes:

  • We are over-eager and get into trades before our signals tell us to. This erodes profitability over many trades.
  • We don’t want to take a loss, and so we hold onto the loss hoping the trade will turn around. This erodes profitability.
  • We are afraid to make a trade, possibly because of a few recent losers, and so we skip some trades because we are afraid to lose. This erodes profitability.
  • We are over-confident, possibly after a winning streak, and so we take extra trades not included in the plan. This erodes profitability.
  • We over-or under-bet. This means we take a position size that is too large or too small. Small mistakes add up over time, and big position sizing mistakes can cost us dearly.
  • We trade our current trade based on the experiences of past trades. We let past trades impact how we act, instead of following our plan. This erodes profitability.
  • We focus on trading for results instead of following a process. Our trading plan dictates our returns. If we follow it, we make those returns. If we try to be smarter than our plan and change it on the fly, the profits from our plan disappear.

We all make some of these mistakes some of the time, and there are many other mistakes we could make as well. If over time, each little mistake erodes profitability, the fewer mistakes we make the more profitable we are. As discussed in the systematic section, on average pro traders just make fewer mistakes than amateurs. The pros’ methods are more researched and refined, and they are better at following that well-research plan.

4) Psychological
Trading is almost entirely psychological. Everything we do is processed through our brains. Our beliefs and biases affect what we see, hear, and do. Without training our minds to follow specific protocols, and without training our minds to handle our problem areas, we are dead in the water. Learning a new strategy doesn’t do us any good if we can’t get our mind to follow it.

  • All the trading issues above can be linked back to psychology. Being afraid to trade is obviously psychological, but so is being over-confident, not wanting to take a loss, or being too eager. Even under-betting and over-bettering are related to psychology, such as being impatient, not having a process, or letting our biases affect how much or little we take of a trade.
  • There are hidden biases and beliefs that sabotage us. This is a topic all its own. No matter how good of a strategy a person has, if they have a belief that they will never be rich, or that they aren’t good enough, those beliefs will put up roadblocks to becoming rich or successful at trading. If your psychology is getting in the way of making money, I suggest digging into Van Tharp’s trading psychology books and courses.
  • Time needs to be put in, but research and practice are also psychological. We need to find ways to practice and improve that work for us. We need to overcome those little voices that say we don’t need to put in work, that we are smarter than others, that we should watch a movie instead of research, that we should read a book instead of practice, that practice is for people who suck…we need to overcome whatever voices tell us not to practice or put in the work required to get what we want (I suggest reading Trading Beyond the Matrix by Van Tharp).

If we overcome our little negative voices and put in the work required, then we become much better traders. And that is all that matters in the market—can your profits exceed losses based on the opportunities that other traders offer to you.

Cory Mitchell CMT is the founder of Vantage Point Trading and can be contacted by Twitter @corymitc

Cory Mitchell began trading in 2005.  He has a degree in business, the Chartered Market Technician (CMT) designation, is a member of the Market Technicians Association and the Canadian Society of Technical Analysts.  He has been heard on radio interviews across the US, and is a regular contributor to Stock & Commodities magazine,Investopedia, DailyFX, Benzinga, ForexPros, Oil and Gas Investments Bulletin, The Daily Abstract as well as many other sites.

Trading extensively in stocks, forex, ETFs, futures, options and CFDs, Cory has worked for and with Fortune 500 companies managing and implementing foreign exchange strategies.  Currently Cory is an independent proprietary trader focusing on stocks, ETFs and forex.  His day is divided between trading and writing about the financial markets.

Cory Mitchell began trading in 2005.  He has a degree in business, the Chartered Market Technician (CMT) designation, is a member of the Market T...