Why most newbie traders fail?

[Yokiro]

It is said statistically that 90% of the people who enter the Forex market end up failing and thus losing all the money they used to trade. But why are all these people ending up failing with so many strategies out there and such a big chance of building up a fortune?

The simple answer is: They don't treat their trading accounts as their businesses. Yes! Forex trading is a business. If you reject this idea you have failed or will probably fail as part of that 90%.

When you deposit your first $100, $500, $1,000 or whatever... you are making an investment to start your own business. That money needs to be carefully managed on each trade because if you don't, your business will collapse. Everyone knows a business needs to be run with patience, responsibility and most of all discipline.

Newbie traders are in for the big bucks, and that is not bad at all. I am in for the big bucks as well and I actually have a big amount on my trading account. However, newbies want to make the big bucks overnight and that is the BIG mistake. We all know that trillions of dollars are flowing every day through the forex market but that doesn't mean we get to have a big cut of the cake right on day 2.

Trading is a skill you need to learn based on discipline and self-control. Humans are greedy by nature and that has to be ripped off from us when trading. We cannot expect to have 100 pip gains on our first day (unless you have been practicing with a demo account that won't happen).

Forex can really change your life as it has for many of us. The key to build a successful forex business is to go for small but consistent earnings at first. Then as you grow your trading account and you are confident with your skills, you will be able to trade bigger amounts of money and get growing at a faster rate. I dare to bet that most of the successful traders that have made forex their living, started this way. It is recommended that when starting you only trade 2% of your trading account on each trade. As you get confident with the market and your skills get it up to 3-5%. When you feel considerably comfortable then you will be able to trade up to 10% of your account.

You can't just enter the market and get rich tomorrow. Unfortunately that won't happen. But if you are disciplined and get to know the principles you will become successful and believe me you will make a fortune if you do it right.

Good luck with your trading and don't be greedy!

Yokiro.

 

[gamma]

It is recommended that when starting you only trade 2% of your trading account on each trade.

This is one of the most overused phrases in trading and in my opinion one of the most ridiculous ones.
Ok lets analyse it, say you have an account with $1000 in it so now you use $40 of that for your first trade as you need to put your stops so near the only option you have is to day trade and we all know where that path leads.
Being a beginner the chances are you will take 3 or 4 losing trades before you realise your stops are too near.3 or 4 losing trades and you are down 12 to 16 percent of your account.
A far more sensible approach is to say if your account is anything up to $1000( and most new traders only have accounts this size or smaller) use 10% of your account and have larger stop losses. Basically do not put yourself in a position where the only option is to scalp or day trade.

 

[Trader333]

As you get confident with the market and your skills get it up to 3-5%. When you feel considerably comfortable then you will be able to trade up to 10% of your account.

If you risk 10% of your account per trade regardless of how good a trader you are then you will get wiped out.


Paul

 

[Vaco]

i agree with paul,

However lets face it $1000 is not enough to trade effectively. How many other businesses would you attempt to start with this sum of money.

 

[gamma]

Paul,
I agree with you, However the point I am trying to make is if you have a small account then by risking 2% of your account then you only have a very limited number of options open to you in the stop loss field.
Ok if your account value is 10k then the whole 2% thing makes sense. but with anyhing below 1k and the whole ball game changes.

 

[gamma]

i agree with paul,

However lets face it $1000 is not enough to trade effectively. How many other businesses would you attempt to start with this sum of money.

Totally agree.
But you will be surprised at the number of people who open accounts with ridicilous amounts. Well can you blame them you have so many bookies advertising that you start trading with $100 in your account.
Anything below 10k and you are asking for trouble.

 

[Vaco]

Totally agree.
But you will be surprised at the number of people who open accounts with ridicilous amounts. Well can you blame them you have so many brokers advertising that you start trading with $100 in your account.
Anything below 10k and you are asking for trouble.

no not brokers,

you have so many bookies telling you you can open an account with £100 and you can but with an account this small and min bets at £1 a point it is just like gambling.

 

[gamma]

My Apologies for misquoting, thankyou for the correction Elefteros.
Shall edit straight away.

 

[Vaco]

My Apologies for misquoting, thankyou for the correction Elefteros.
Shall edit straight away.

(no need to apologise)

I only say because with CFds i think you need £2.5 min deposit. With D.A. trading futures, mini dow for example you need just over £3k and thats just to trade a single contract not including room for the trade to swing against you.

This is what people must understand before opening a spreadbet account. they want as many punters as possible for revenues. That does not mean you can make a success out of it with a £100 account!

 

[MrGecko]

This is one of the most overused phrases in trading and in my opinion one of the most ridiculous ones.
Ok lets analyse it, say you have an account with $1000 in it so now you use $40 of that for your first trade as you need to put your stops so near the only option you have is to day trade and we all know where that path leads.
Being a beginner the chances are you will take 3 or 4 losing trades before you realise your stops are too near.3 or 4 losing trades and you are down 12 to 16 percent of your account.
A far more sensible approach is to say if your account is anything up to $1000( and most new traders only have accounts this size or smaller) use 10% of your account and have larger stop losses. Basically do not put yourself in a position where the only option is to scalp or day trade.

Think you've got your wires crossed here Gamma.

Firstly, risking 2% of your account means after 4 losses, you're down to 1000*(0.98^4) = 922; the risk for the 5th trade, at 2%, is 18.44, not the same 20 you started at.

Secondly, the whole idea of fixed pip or fixed $ losses is counter-intuitive; the placement of a stop is determined by the market, not one's capacity for risk. The 2% risk is then engineered through position sizing.

Consequently, having a small account doesn't necessarily mean you are tied to scalping or day trading. It is simply a case of finding a way to place very small $ per pip Spread Bets - Oanda are good for this - it would be possible, in the example above, for a trader to take their 5th trade at 2% risk, with a stop 50 pips away, by having a position size that returned +/- $0.3688 per pip. Risking 10% and choosing arbitrarily large stops is a recipe for disaster.

This is where I imagine lot of traders go wrong. The fixed $ per pip trades offered by some SB's and DMA brokers are massively out of proportion with their minimum account sizes - for trading via ECN to be sensible, a trader must have a sufficiently large account that correct position sizes can be made up of fixed lots. For the same 50 pip S.L. trade, 2% risk implies a position size of $25,000 for a major pair, up to $37,500 for some crosses. Further still, this is only suitable if the trader doesn't start losing right off the bat - IMO DMA becomes feasible only with an account of $50k + to account for drawdowns, etc...

 

[Rhody Trader]

This is one of the most overused phrases in trading and in my opinion one of the most ridiculous ones....
A far more sensible approach is to say if your account is anything up to $1000( and most new traders only have accounts this size or smaller) use 10% of your account and have larger stop losses. Basically do not put yourself in a position where the only option is to scalp or day trade.

It really depends on your market. There's at least one major forex broker which has no minimum trade size (no fixed lots) which means doing a 2% risk - or whatever level you like - is no problem at all, no matter the timeframe.

 

[Hoggums]

I think that you could trade successfully with only £1000 provided you only took the trades you could afford.

e.g. if the stoploss you wanted was 50 points away and the minimum bet was £2 a point (talking SB'ing here) then you'd be risking 10% of your account - therefore don't take the trade!

Of course - how many newbies have the discipline to do that!

 

[Kingwizz]

I would say it is a combination of the way in which people are, of-course ripped of by countless scams & courses (Bearing in mind the beautiful Woody Allen quote "Those that cannot do teach & those that cannot teach, teach P.E"). But most importantly the way traders react to risk. Unfortunatley the only thing between winning & losing are emotions. You start to feel that everybody in the trillion $ markets are against you & that maybe it isn't for them. That's the single are to the question "Why isn't everybody doing it?".

 

[magten]

money management is vital no matter if you have $1000 or $1000000 in your account.

 

[montpro]

Biggest problem I have found with small account balances is overtrading and then getting a margin call. I am a newbie to forex and have lost £'000's in 3 months, but like someone said - its a business and I see it as my investment in learning. I have a much larger pot now and try to keep trades within 3-5% and trade only when the trade meets my criteria. I agree that 10k would be the minimum needed to start off with, together with research and discipline.

 

[BSD]

Most newbies fail because they are not in this to make money, they are in this to satisfy a primitive urge to be proven right.

Most newbies fail because they never learn to seperate their ego from their money making needs.

Most newbies fail in this because they never manage to identify what is success relevant; or if they do, they never manage to develop the discipline to actually do it.

Most newbies fail because they never learn to rid themselves of the no-fail identification mark of the eternal net loser: pointless obsession with win rate.

You can, as per Market Wizard Linda Bradford Raschkes research, construct a simple mechanical system with random entries where you have targets of 0.5 ATR's and stops of 3 ATR's which will, over thousands of trials, over 22 markets, and with ten years of data, generate an 82% win rate, but you've still got a net loser on your hands.

You can obviously also have high hit rate strategies that are net profitable, but you'll never be able to compound them for eventual liquidity issues, meaning even if you are high win rate rate you're still doomed to perpetual small frye-dom.

Whatever ones inclination RE hit rate, an issue that is entirely controllable through sizing of stop losses and targets, outside of the realm of net losers with the perpetual lack of proof to their braggings that pubs / bars / clubs / boards the world over are full of and that strangely inevitably die poor like W.D. Gann, you have the real world where real money is traded for a living and with audited track records where the following holds true:

Kenneth Grant, in "Trading Risk: Enhanced Profitability through Risk Control", depicts his experience as risk manager for some of the best and most successful hedge funds in the world, amongst others Paul Tudor Jones funds and Steve Cohens SAC Capital, that:


"ACROSS ALL TRADING STYLES, TIME FRAMES, MARKET CONDITIONS AND TRADERS, ONE RULE HOLDS TRUE:

10% OF ALL TRADES INEVITABLY ACCOUNT FOR 90% OF PROFITS !"


Bill Lipshutz who was featured in the "New Market Wizards" was for his 8 years at the then Salomon Brothers their biggest and most profitable FX trader, earning, on average, US$ 250 K / day for his employer before he started his own hedge fund. The way he did that was by going for excellent risk / reward levels where he had winning trades no more than 20 -30 % of the time, but vigorously cut his losses short while letting his winners do their winning.

Fellow Market Wizard Bill Eckhardt, ex partner of Richard Dennis in the famous Turtles experiment, who to this day is one of the most successful hedge fund managers out there, had this to say:

"One common adage on this subject that is completely wrongheaded is: you can't go broke taking profits. That's precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance." - William Eckhardt

The newbie is gonna read this review of relevant and above all proven benchmarks and still continue their never ending quest for a 90% win rate system out there that has a 10 to 1 risk reward ratio, lol.

That's why 90% of people who try their hand at this never turn the corner to becoming net profitable, because they are on an entirely irrelevant quest for a totally non-essential holy grail.

;-)

 

[BSD]

PS:

Most importantly, most newbies fail because they never get it that KISS is what this is all about, that success is achievable by keeping it simple.

Trading is maybe not always easy, but it's most definitely not even a distant cousin of rocket science.

Anyone who tells you something else is either trying to con you into buying sthg from them, or is a clueless net loser massaging their bruised ego.

Harvard Uni did a famous experiment where two groups of students had to come up with explanations to simple problems.

The first group got the right feedback from their professors, ie if they had come up with the correct explanation they received a "correct", if not they got a "wrong", while the second group got random evaluations, so that even if they were right they might have received a "wrong" and vice versa.

The first group came up with admirably simple solutions.

The second groups explanations became increasingly complex as they tried desperately to force the inexplicable facts to fit their constructed theory.

The same goes for trading.

William of Ockham very rightly observed in what came to be known as Occams Razor, "All other things being equal, the simplest solution is the best."

All other things in trading are very equal, and you'll make more money than you can ever spend by keeping it simple, by being right no more than 30% of the time provided your winners average out at 3 times the size of your losers.

 

[Gumping]

Most newbies fail because they are not in this to make money, they are in this to satisfy a primitive urge to be proven right.

Most newbies fail because they never learn to seperate their ego from their money making needs.

Most newbies fail in this because they never manage to identify what is success relevant; or if they do, they never manage to develop the discipline to actually do it.

Most newbies fail because they never learn to rid themselves of the no-fail identification mark of the eternal net loser: pointless obsession with win rate.

i.e. they are tw*ts :idea:

 

[charliechan]

If you risk 10% of your account per trade regardless of how good a trader you are then you will get wiped out.


Paul

only if you are trading in a mechanical way, in which case you will probably get wiped out either way.

there is nothing wrong with putting up 10% for the right opportunity. for me, i see less risk in waiting for the right opportunity and go in big when the opportunity presents itself than risk 5 losers of 2% while i hope my method/system works as well today as it did when i tested it. blind faith anyone?

anyway, i digress.

the reason most fail is due to the spread. undercapitalised traders are shooting themselves in the foot from the get-go as they will probably have to pay a wider spread due to their account size making the problem worse.

when risking a small % on a trade, 2 things happen. firstly, the loss is small so is seen as insignificant. this encourages overtrading. secondly, 2%'s soon add up and little is learned. more transactions = spread.

we haven't even touched on the tricks fx 'brokers' to use the term loosely play. if a new trader wants to last longer than a new york minute, they are better off trading in a real market with real rules and regulations.

 

[barjon]

For my twopennyworth, my opinion on why most newbies fail is:

Firstly, they jump straight into what I think is the most testing environment of all, which is day trading. It's like someone who has just learned to drive entering the UK RAC Rally and expecting to be competetive.

Secondly, they are reluctant to lose and often lack the discipline to take losses early. Many don't like a mechanical stoploss order but are prone to ignore the mental one (the "I'll wait for it to come back", "oh, look it has come back I'll wait and see if it continues in the right direction now" and variations on that theme).

Thirdly, they are often frightened of seeing their wins evaporate and get spooked out of good trades too early. It's easy to get mesmerised by the ups and downs of a 5 min chart and see all sorts of dangers where not much exists.

Fourthly and paradoxically, they often do see their wins evaporate away to nothing (and less) as they ignore signals that real danger does exist.

The result of these last three is that they have losing trades that outweigh their winning ones or, for those more disciplined, have one or two lapses where severe losses wipe out a series of carefully nurtured profits.

Interestingly, I've watched my son go through this recently (he's emptied my play account twice so far), particularly the getting spooked out but ignoring real danger signs. I think it's something to do with the speed of the action since real danger tends to come fast and zip past any mental "take profit" point leaving him looking for it "to come back" (which it does only rarely).

good trading

jon

ps: ...and too many look for trend reversals and forget that the trend is your friend.