Why most newbie traders fail?

BSD

Veteren member
Feb 8, 2006
3,819
984
#16
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

Veteren member
Feb 8, 2006
3,819
984
#17
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

Established member
Sep 27, 2007
874
150
#18
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

Experienced member
Jun 18, 2005
1,009
120
#19
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

Legendary member
May 6, 2003
10,095
1,493
#20
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.
 

Splitlink

Legendary member
Nov 18, 2001
10,850
1,231
#21
You put your finger right on it with your "ps:" I wrote a rather exasperated post on the LLOY thread, in "UK shares", last night. It's extremely hot in Barcelona just now and I came home a bit sticky, prickly and impatient.

It surprises me how traders will try to spot the bottom of the bank sector's slide when they should be taking advantage of the beautiful trend that we have been enjoying (i.e. short traders) over the last few weeks.

Good trading, Split
 

tommac

Active member
Jun 3, 2008
202
13
#22
I think the REAL reason that 90% of newbies fail is the harsh fact that 90% of newbies should not be trading.
A Doctor/Solicitor?Plumber etc takes many months/years to train . Likewise as a Bank trader it was at least 6 months intensive work in a very busy dealing room before being allowed anywhere near a deal. It`s hard enough in the "city" environment let alone sitting at home. A couple of weeks on a demo account just doesn`t cut it. Yes -there will be exceptions but most are dreamers. :) Just one opinion.
 

Splitlink

Legendary member
Nov 18, 2001
10,850
1,231
#23
I think the REAL reason that 90% of newbies fail is the harsh fact that 90% of newbies should not be trading.
A Doctor/Solicitor?Plumber etc takes many months/years to train . Likewise as a Bank trader it was at least 6 months intensive work in a very busy dealing room before being allowed anywhere near a deal. It`s hard enough in the "city" environment let alone sitting at home. A couple of weeks on a demo account just doesn`t cut it. Yes -there will be exceptions but most are dreamers. :) Just one opinion.
Yes, it's true but I think that you, as a professional trainee, must convince your bosses that you are capable of trading other people's money.

I think that there is a difference. A beginner can draw his horns in and trade modestly, within his budget, and become successful in less time. However, the management of his money is a prime factor. Once it has gone there is no more!

As you say, dreaming and spending it before you have gained it is a common failure but you have an incentive that we don't have.

If you you lose their dough, you're fired! Real Alan Sugar stuff! :D

Split
 
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stevespray

Experienced member
May 24, 2001
1,289
154
#24
I feel that there are many reasons why people fail in this business and, as in most walks of life, there is no ‘one fits all’ answer and because of this certain people may fail for one single reason or perhaps, more commonly, a combination of reasons which statistically combined leads to the increase in the probabilities of ‘risk of ruin’.

Generally these reasons might be;

1 Failure to learn to control emotion which leads to poor decision making.

2 Failure to understand fundamental and simple mathematics which they are battling against if too larger percentage of one’s trading pot is risked on individual trades.

3 Failure to recognise and then fully understand that trading, especially short term, is about probabilities and NOT PREDICTIONS.

4 Entering the market place with preconceived ideas about trading which are not only false but destructive. For example someone might say that “If I have a better computer with four screens and a lightning fast internet connection then I will be a better trader”.

5 Under capitalisation and / or external money pressure which leads a trader into a position where they feel that the market must produce ‘regular’ and ‘consistent’ profits for them. This causes emotional strain when the market doesn’t fulfil our inherent emotional demands ie regular income.

Steve.
 
Likes: johnlvs2run
Jan 14, 2003
8,447
873
#25
there is nothing wrong with putting up 10% for the right opportunity. for me
In my view this will still depend on the success rate of your approach regardless of whether it is discretionary or mechanical.


Paul
 

BSD

Veteren member
Feb 8, 2006
3,819
984
#26
Great posts here.

Another cause of failure for the 90%ers of Net-Losers-United is Holy Grailism.

The average loser comes up with a good system. Irrespective of win rate every system can and will go through strings of losses.

Whats your average loser do when faced with the inevitable, a succession of trades going against them ?

They lose faith, dump their system, and go looking for a new one.

Not everybody will agree with me on this, but I am firmly convinced that a good, robust system, a system that is aligned with how markets work, would have have worked in the day and age of Jesse Livermore just as well as today.

Reminiscences of a stock operator is what taught me trading, and that book is a hundred years old.

I do not think that markets change, simply because humans don't change, and humans are the ones that drive markets, be it discretionally or through computer models that humans wrote, it's always a human at the end of the day who influences what happens.

Markets just simply are not predictable...

Why are they not predictable ?

Because Markets are nothing else than the collective result of all their participants actions...

Actions driven by hope, fear and greed, on what will happen next.

There is no inner logic to markets, there is no system to markets, there is no secret explanation to price development...

Anything can happen at absolutely any time if somebody influential gets a brain fart and shares that with the media, or if a large enough order pushes a market in a direction opposed to what your clever analysis would have you believe should happen next...

Markets are simply constantly being pushed to and fro by the diverging interests of all their participants, all following their own agenda.

A market is nothing else than a conglomeration of huge numbers of participants all following totally different objectives...

You have hedgers, you have speculators.

You have fundamental traders, you have technical traders.

You have scalpers, daytraders, swing traders, position traders.

You have participants that see the same price levels, yet for some price is too high, for others it's too low.

Etc etc.

Every participant in markets has a different perceptive, different objectives, and different risk parameters.

That is why the notion of predictable markets that follow some inner system is nonsense, thats why the search for Holy Grail unlocking the secret to markets is a quest best left to the 90% of net losers.

The market is composed not of an inner logic or system that would be seperate from it's constituting participants, no, a market is nothing but the sum of it's constituting participants, each of whom has his own agenda, doing his own thing.

Anybody who honestly believes that markets do what technical analysis says they should do next should just watch Mr Soros buy 10 Billion Euros and see what happens to all their clever analysis.

You can generate a random chart of anything, and that chart will look exactly like a real chart of a real instrument !

Anybody who honestly believes that a chart of a real instrument will look different than it's random counterpart has just never looked at a random chart.

BUT, where academia got it wrong, is that randomness of markets absolutely does not mean you cannot profitably trade them.

Random charts have tradeable trends just like all charts do.

The real problem is that people like to believe that they are clever, and that they can, through their cleverness, analyse situations, come up with the correct answer, and solve problems.

Ego dictates that people have a real need to believe that success is their very own achievement, while lack of success is usually attributed to circumstances beyond their control.

Look, we know that trading has nothing to do with being right...

Brett Steenbarger:

"...As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability...."


Why do people still insist on wasting time, money and effort on solving problems that do not exist, on trying to outwit what cannot be outwitted, markets that are nothing else than the sum of all our actions ?

There is no pattern that tells you what will happen next, BUT you do not need that to make more money than you can ever spend.

Stop chasing the holy grail, stop believing that if you just keep on studying markets you will one day be able to predict what happens next, you do not need to feel that you understand price to get rich.

Markets can go up, down or sideways, that is all they do.

All you need to make a fortune is to do what any kid in kindergarten could do, grab a chart, eyeball where the path of least resistance is, jump on board, cut your losses when and as they occur, and otherwise ride that trend all the way until it bends.

Trading is nothing than a probability game.

You create your positive expectancy not through predicting markets.

You create your net profitability through your prefered combination of risk / reward ratios and win rate, through either on average letting your winners run longer than your losers with a lower win rate, or by cashing in smaller winners than losers albeit with a higher win rate.

That is all trading is, it's not about being right, it's about making money by understanding that it's just a numbers game.

Next time someone tells you they have a great new system thats gonna beat the markets just give Mr Soros a call and tell him to buy ten billion worth of EUR/USD while watching your friends pipe dream go up in smoke.

Like Exile says, trading is simple, maybe not easy, but simple.

KISS !
 

BSD

Veteren member
Feb 8, 2006
3,819
984
#28
Mini-Mouse, this here shows what I'm on about RE random charts:

Click: Trading a Random chart

A chart based on random data generated by MS's random number generator, as in this case, looks the same like a chart of the Euro or BP, with ranges, uptrends, downtrends, support, resistance, etc, and, accordingly, with the same tradeable elements.
 

fayalac

Established member
May 3, 2008
560
14
#29
Yokiro, trader..., i agree with you. I woke up these morning thinking on how to improve my development and the first i thaugth was Yokiro´s conclussion, the second that came to my mind was Trader333 advice, so in these case i´m in a trap.
To see my trading as a bussines i shouldn´t expose far than 5% on each trade, considering a very short time frame, but since my trading account doesnt have too much money on it i only have two choices, the first one - and easier when you can do it - is to increase my trading account´s equity or the second which most of the people will have to face is, to increase a small amount account you will have to face high risk, so be very - extremelly - carefull when you get in and out of any position. As long as your trading account fund´s increases yoiu have the chance to decrease steadilly your exposure.
Most of the newbies, in these point Yokiro seem´s as a guru, doest have the expertise to completelly understand what i say in the second pharagraph, but most of what i already know is due to the advice i´ve got in these and other forums. Anyone can understand these. So before trying to make a big account my advice is be wise and remember, since we have two ears and one mouth, we should hear twice than we speak.
 
Jun 28, 2008
30
7
#30
so many of you are right and so many of you still have no clue. but thats ok it takes years to get there. to become a pro trader you must become a pro loser. too many traders just dont get this but in reality you can lose 7 trades out of ten and make money. you can also start with a small account no problem, it just takes longer to get the momentum going which is ok for newbies because they need the screentime
 
Likes: johnlvs2run