Trading Failure Why 90% Of Traders Fail

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Random Reinforcement: Why Most Traders Fail

Random Reinforcement: Using arbitrary events to qualify (or disqualify) a hypothesis or idea; attributing skill or lack of skill to an outcome that is unsystematic in nature; finding support for positive or negative behaviors from outcomes that are inconsistent in nature—like the financial markets.

One of the most interesting topics in trading, and really throughout many areas of life, is random reinforcement. Random reinforcement, as it relates to harmful trading practices, occurs when a trader attributes a random outcome to skill or lack of skill. The market occasionally rewards bad habits and punishes good habits because the market is so dynamic. It is especially negative if a new trader who wins a few trades, with absolutely no plan whatsoever, attributes this success to “intuition.” Random reinforcement can also hurt veteran traders who experience a string of losses and believe they no longer possess skill. (See also: Trading Psychology and Discipline.)

Random reinforcement can create long-term bad habits that are extremely hard to break. It is equivalent to gambling addicts who keep playing because they win just enough to keep them there, but of course they are losing their money over the long run. A successful card player may also experience a significant draw down, abandon his proven strategy and in doing so give his edge back to the house. (See also: 10 Cleaning Tips to Spruce Up Your Trading.)

How Random Reinforcement Affects Us

The concept of random reinforcement is hard to grasp for some traders, but understanding it can be the difference between actually improving as a trader or simply believing we are improving when we are not. The best way to understand this to go through a few examples.

[You are more likely to avoid the issue of random reinforcement if you consistently and meticulously incorporate the proper technical tools in your analysis. To learn more, check out the Technical Analysis course on the Investopedia Academy, which includes interactive content and real-world examples that can help you along the path to profitable trading.]

Example 1: Relying on Random

John is a new trader. He has a business background, watches the news and follows the stock market, but he has not traded personally. He feels he has a good handle on what it takes to be a good trader, but so far, he has not written any of these methods down. John has opened a trading account and believes his background knowledge will make him a profitable trader. Opening his charts for the first time, John see a default stock in the trading platform, and it is rising quickly. He quickly buys 200 shares without even thinking. The stock continues to rise while he makes lunch. After lunch, he comes back and sells his shares, making himself a $100 profit after fees. John makes another trade and ends up with a similar result. He is starting to feel that he is very good at this and that he must have a “knack” for trading.

In analyzing the situation, experienced traders will notice a few things that could lead to short-lived trading career for this trader. The main problem is that several successful trades are not a valid sampling for if a trader will be profitable over the long run. John, the trader in this case, needs to make sure that he does not fall into the trap of believing that his current methods, which are still very much untested, will bring him long-term success. The danger lies in refusing proper market guidance or methods, whether self created or provided by someone else, because this initial untested method is believed to be superior based on these preliminary trades. The trader can begin to think very strongly that, if it worked once, it can work most, or all, of the time. The markets will not reward erroneous thinking over the long run but may reward random and unplanned trades some of the time. (See also: 9 Tricks of the Successful Trader.)

In the next example, we will look at random reinforcement again, but from a different angle. This example pertains more to experienced traders, or traders who are coming to the market with a written down strategy or method that is back tested or proven to be profitable in live trading. It should be noted that not all methods that were successful in the past will continue to be, as we just found out in the previous example (on a small scale). But methods that have shown success in the past are more likely to provide a chance of profitability in the future than a method that is completely untested or has never been profitable over the long run.

Example 2: Abandoning Strategy

John has now been trading in the markets for some time. He realized that approaching the market without a well thought out, written down and well researched plan was a mistake. He has overcome the problems evident in the first example and now has a solid trading plan for approaching the markets. This method has worked well over the past two years, and he has made money.

John is now facing another problem. Despite past success with this plan, his method has now led him to nine consecutive losing trades, and he is starting to worry that his plan is no longer working. John therefore changes his plan for trading, as he feels his method is no longer valid. In doing so, John ends up trading a new untested method, possibly similar to when he started trading.

The problem in this example becomes evident when John abandons his method, which has been successful, in exchange for an unproven method. This could put John right back to the beginning, even after trading successfully in the markets for a number of years. (See also: Day Trading Strategies for Beginners.)

Why did this happen? John failed to realize that, while randomness can create winning streaks using a flawed trading method, randomness can also create a string of losses with an excellent trading plan. Therefore, it is very important to make sure a trading plan is not actually going to work anymore (was the original success random?) or determine if this could simply be a run of losses based on current market conditions that will soon pass.

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All traders experience losses, and there is no definitive number of losing trades in a row that will tell a trader if his or her plan is no longer working. Each strategy is different, but we can learn to deal with randomness. (For more, see: 4 Key Elements to Create a Successful Trading Plan.)

What We Can Learn

Once we realize that randomness can create strings of losses in great trading plans and strings of profits in poor trading plans (and also scenarios that fall in between these examples), how do we adjust to trade profitably over the long term?

While each trading plan is different, each trader must have a written trading plan that outlines how he or she will trade. This plan should be well researched and lay out entries, exits and money management rules. In this way, the trader will know over the long run if the plan is flawed or successful. It is also extremely important to risk a very small percentage of capital on each trade; risk levels of each trade should be covered in the trading plan under the money management section. This gives leeway to the trader, as he or she will be able to withstand a string of losses and be less likely to make a premature change in the trading plan when it is not needed. (See also: Ten Steps to Building a Winning Trading Plan.)

The Bottom Line

The markets are extremely dynamic and in constant flux. This brings in an element of randomness that can create profits for unskilled traders and losses for skilled traders, and it happens all the time. A trader must also determine when a certain string of losses or profits can be attributed their skill and when it is random.

The only way to do this while you are learning is to approach the markets with a trading plan and risk a small percentage of capital on each trade. In this way, the trader can see how a method performs over the long run, in which randomness becomes less of a factor. It is also important to remember that even the best traders and trading methods experience strings of losses, and this is not reason to abandon the strategy. However, isolating why the method is no longer working may help lessen the extent of the losses when similar adverse conditions arise again. (See also: Financial Ratios Tutorial and Investing 101 Tutorial.)

#1 Reason 90% of Traders Fail and How You Can Avoid Being One of Them

As Human Traders, Our Biggest Enemy is Ourselves:

The average person is attracted to the market for one reason – the potential rewards (money). Plain and simple. From the outside, it seems like a quick and easy pathway to riches. If you’re over 18 years old, have at least a couple hundred dollars, and an internet connection, you can open up a brokerage account today and start placing trades. There are no tests, certifications, or any formal education required. You can jump right in on day one and call yourself a “trader”. There’s really nothing else like it in the world.

But just because it’s so easy to physically start making trades, doesn’t make it wise to do so. As with anything worth doing, it takes time, dedication, and sacrifice to achieve success. Sure, some beginners will end up winning on their first few trades by pure luck, which unfortunately deceives them into thinking they already have the skills to trade efficiently right from the get-go, but there’s a substantial difference between winning and being a consistent winner. Pure luck is short-term, but consistent traders who implement knowledge, structure, and discipline into their approach have the ability to generate durable, long-term market success.

Drop the Obsession With Money and Other Material Possessions:

It’s great to have goals and aspirations – there’s no doubt about that. But if you’re entering the markets solely for the money, then you’re doomed for failure. The core of trading consistently relies on finding an edge, creating rules, and strictly adhering to them. But if you have an overwhelming craving for money and other material possessions, it will have a tendency to cloud your judgement and impede your overall trading success. Acting impulsively over-and-over again in an attempt to get-rich-quick is a recipe for disaster.

|Why is it So Difficult to Become a Consistently Profitable Trader?|

It’s a rather difficult thing to do, but you have to train your mind to forget about the possibilities (money, cars, houses, etc.) and focus on the probabilities (risk vs. reward). Remember that your actions in the current moment, which should involve sound risk management and flawless execution of your trading plan, will be the key to your long-term trading success. In a nutshell, success and failure in the market is based on how you behave and how well you control your emotions on a routine-basis. When you focus on the process, the outcome takes care of itself. So good trading shouldn’t solely be judged by the profit/loss in your account, but by how disciplined you were in adhering to the strategy. In the end, the less you concern yourself with money, the more the market will send your way.

Accept That You Won’t Be Right on All of Your Trades. If You Can’t, You’ll Fail.

The idea that you have to be right on all of your trades is a fallacy. In fact, it’s possible that your win rate could be less than 50% and still be profitable, as long as the winning trades are larger than the losers. But the point is, you can’t be too stubborn to take losses. Psychologically, people tend to view their losses in the market as a personal attack – a shot at their own deficiencies and shortcomings as a human. That type of emotional reaction when released into the market can cause accounts to spiral out of control, and fast.

|Top 3 New Trader Mistakes – Clean Up Your Approach and Start Profiting|

So instead of cutting the loss, they bend their rules, holding on and hoping the stock will eventually return to their entry price. But it doesn’t – it just continues falling. Eventually, the loss that could’ve just been a tiny paper cut is now a giant gash in the account. Ultimately, that “refuse to take a loss” mentality can be devastating to accounts over time. The market is filled with uncertainties, so being right on every single trade is simply impossible. No amount of long-lasting success will come to you in the markets if you can’t consistently act in your own best interest, so stick to your rules and execute your trades properly.

Top 10 Trading Concepts to Understand If You Want to Achieve Consistent Success:

  1. Focus Primarily on the Process (Adhering to Your Strategy) Instead of the Outcome (Profits/Losses).
  2. Relying on “Luck” is a Dangerous Practice. The Market Will Eventually Punish Your Account For Your Lack of Discipline.
  3. Have Rules and Stick to Them. Your Long Term Success is More Important Than Any Short-Term Emotional Gratification.
  4. A Need For Being “Right” on Every Single Trade Will Ultimately Lead to Failure. Risk and Losses Are Part of the Game.
  5. Full Concentration on the Execution of Your Strategy Reduces the Occurrence of Distracting Emotions like Fear and Greed.
  6. Trading is Not About Getting Rich Today, So Don’t Obsess Over Money and Other Material Possessions.
  7. Outputs Derive From Inputs. There’s No “Luck” or “Magic” to it. You Have to Work Hard to Achieve Success.
  8. Without the Right Mindset and Discipline, Even the Most Robust Strategy is Doomed For Failure.
  9. Structure (Strategies and Trade Plans) Are Required to Reduce Your Tendency to Act Impulsively and Make Errors.
  10. Winning Traders Methodically Execute Their Strategy, While Losing Traders Make Excuses.

The Wrap Up – The #1 Reason Most Traders Fail is Due to Their Mindset:

A proper state of mind is the most underrated asset of a consistently profitable trader. The psychological aspect of trading is truly the glue that brings everything together. The strategy and risk management plan would be nothing without a prepared and disciplined mind. Trading success is much more than just knowing a proven system or strategy. A system is just theory unless properly executed with discipline. And trading isn’t merely math and logic like some people think. Sleep, nutrition, and exercise all play a role in your trading success as well. Overall, it requires a relaxed mind and full concentration on the current moment, not on the result. If you focus on the correct process, then the result will take care of itself.

Most traders, unfortunately, put the cart before the horse, meaning they don’t focus on themselves and their own psychology first. They’re not in tune with their emotions and often left wondering why they haven’t yet been able to achieve consistent success. But no system will save you without self-observation, self-analysis, and self-discipline. Believing that markets will conform to all of your personal expectations will only be met with frustration, disappointment, and losses. The market doesn’t owe you anything. If you jump in with insecurities, denied impulses, and unrealistic expectations, then it will be there to greet you with misfortune.

Gain Self-Awareness and a More Structured Trading Approach With the Help of Yvan Byeajee:

Overall, 99% of our problems in the market can be attributed to our own minds. Ironically, it can also be our greatest asset if we exercise our abilities to concentrate and be mindful through the act of meditation. I have Yvan Byeajee to thank for opening me up to the critical importance of meditation as a daily routine and the impact of trading psychology in general.

If you want to learn more about the topic of Trading Psychology, I suggest checking out his works: Zero to Hero, Paradigm Shift, The Essence of Trading Psychology, and more. Yvan also offers insights and courses through his blog at Trading Composure.

Are You Ready to Finally Experience Consistent Success in the Markets? Your Mind May Be the Only Thing Holding You Back.

Written by Matt Thomas (@MattThomasEST)

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Comments

Reading through this post has shaped my mentality on trading and today I genuinely see some reasons for previous failure in the market. One thing that really got to me was where you said “Full Concentration on the Execution of Your Strategy Reduces the Occurrence of Distracting Emotions Like Fear and Greed”, that statement is nothing but the truth.

Truth for me is that a lot of people get really greedy with the money and so the thought is that we should keep plugging away until something good comes out if it. This is my opinion is just an act of greed that is usually fuelled by luck. Unfortunately however, nothing good really comes out of anything like that because personally I have been there and I didn’t make so much. It’s sad. We should have decipline when it comes to trading. That is the only way to make what we want.

To be honest, I have suffered quite some good loses on the trades I have taken but they were just loses that taught me the market the hard way. Learning to overcome greed is the first thing then setting the mindset to focus on learning rather than chasing money is another. Thanks for this.

Matt Thomas says

You’re not alone. In fact, pretty much every trader in existence has experienced losses that have taught them hard lessons about the market. The reality is that people don’t naturally have the proper beliefs and perspectives necessary to be successful in such an uncertain and limitless environment. More important than anything in trading, even more than great market analysis, is the understanding that anything can happen on any individual trade. And if anything can happen, then we must have proper rules and boundaries in place to protect us. The market won’t do that for us. We have to have the proper mental structures within us to be able to think clearly, stay disciplined, and act in our own best interest in an environment that for most people seems chaotic and has the potential to illicit some of our worst emotions – fear, greed, despair, frustration, etc.

Md. Asraful Islam says

I purchased the ebook Zero to Hero to understand trading psychology better, and I am very pleased to read it, which has helped me in my future trading approach. So I would say those who want to understand trading psychology can definitely buy this book and grow your trading account.

I wish I read this in 2000 when the internet bubble burst. I had staked $30,000 in the market back then and I have to admit now that I was a day trader…at work, of all places.

I would have saved a lot of heartache if I was disciplined. But nope I got greedy. Instead of cashing out at over $100,000 I let it ride. Back then every tech stock went up at least five-fold on the day of their IPO.

I was very lucky to get half of my money out before I lost it all. That scared me silly off of trading. Now I have my financial advisor do all of my trading. No doubt he has a very disciplined approach to the game.

My days of trading are over, but what a ride. It was fun while it lasted.

The Coronavirus has the markets all jittery now. I guess if I was still in the game I would look at puts…maybe at a later time.

Matt Thomas says

Hi Courtney – I really appreciate you sharing your experiences in the market. There’s no doubt that markets can be quite volatile at times, and it certainly is right now due to the coronavirus and other factors, as you stated. But these are exactly the times when the proper mindset becomes even more critical than ever.

Huge swings in the market can test nerves and induce irrational behaviors, and those with the proper discipline and understanding of market psychology are the ones who will be rewarded in the end. In times like this, money can be made to the downside through shorting and put options. It can also provide great long-term opportunities to buy-and-hold stocks with so many trading at a discount from recent highs.

It all depends on each individual’s strategies/time horizons. Overall, there are always opportunities to be taken advantage of in the market, and mindset is the most important aspect of it all whether your strategy involves bullish moves, bearish moves, or both.

I have been in stocks for three years. The Essence of Trading Psychology is a great book and I recommend anyone reading this book. I haven’t read his other books yet but I’d be more than happy if they were half as good as The Essence. I have gained a lot of knowledge from here and I have been careful about this.

Stephen Peter Jones says

My uncle was good at trading he used to work on the pipelines in Saudi Arabia as an engineer and when he returned home opened up a trading account and made a good go of it. He made some money from that project which was enough to keep him at home with my aunt they both live in Australia. I love the first paragraph about the simple truth that anyone can do it it’s nothing but the truth given the age is 18 or above. I learned a lot from this website so thanks.

Markets are so volatile, they can go down quickly as well as rise quickly, depending on what happening around the world. Markets are so unpredictable as often you do not know what the best price to buy shares at and what the best price to sell them. Holding on to shares when obviously the company is in difficulty is pure folly. At the same time it is not good to panic when markets are crashing around you, as you must see this as an opportunity to buy shares when they have reached the bottom and sell them when you feel that they have reached the max.

The only person that can let you down is yourself, not holding the nerve when you need to. You tips are very much appreciated and will help people to become better traders. Do you think that people need to research more before jumping in to trading?

Matt Thomas says

That’s a great question, Antonio. Generally speaking, I do think people need to research a lot more before jumping into trading. It’s unfortunate, but so many people cut corners by trying to find services that offer “real time trade alerts” that they can blindly copy. But the reality is that simply doing that never really works in the long run. It might work out on a few trades here and there, but without the proper foundation of understanding various strategies, how to plan trades, how to manage risk on those trades, and most importantly, mindset – then consistent success can never be achieved.

Too many people jump right into trading thinking it’s easy and will make them money quickly, but it’s a difficult undertaking to be sure. And it can take a toll on not only your financial health, but emotional health as well. But with the proper mindset, trading doesn’t have to be an agitating, turbulent process. It has the potential to be a calm, smooth experience if approached correctly. And that’s why I’m a huge proponent of the mindfulness courses that Yvan Byeajee has to offer. Mindset is by far the most important aspect of trading, because without a proper one, even the best strategies and plans can fall apart.

Juan Saladin says

You’re totally right, if you get obsessed with money, or too compromised on an emotional level you’re on the path to fail.

I enter a trade to loose a very specific amount of money. If I got in and lost the planned money I was willing to risk, no regrets neither emotional compromises. Problem comes with the wrong expectations. If you enter a trade only and always to win (and win big) you’ll lose your head.

Trade with number, not with dreams, understand you’re aware of the market, but the market is not aware of you.

Honestly, I am one of the 90% traders you meant. I agree with everything you write that psychological factors are very important. And because of your writing, I became self-inspected about the way I trade, especially the “obsession with money”. 2 years ago, I created an account and do trading. At that time, I was hoping to make money quickly. So the action that I do is no different from gambling. I admit, that I was wrong. I became very aware that to be a successful trader requires discipline and consistency.

My husband has been trading stocks for around two years. I think you just have to keep your losses under control and close your position before the loss is too big. It’s unquestionably your mentality. The Essence of Trading Psychology is a great book, and I recommend anyone reading this check it out. I haven’t read his other books yet, but if they are half as good as The Essence of Trading Psychology, I will be more than pleased.

A thorough and educative article about how to tackle trading maturely, and teaching us how to avoid bad outcomes.

I find your advice extremely applicable – we clearly need to abide by some precise rules, among which you also pointed out well the fresh state of mind; where good sleep, exercise, and nutrition matter too. Obsessions are not welcome in the way, long-term strategies are welcome.

Getting emotional when having issues is very common, people who don’t fall into this trap anymore have reached an important level. Accepting the risk of losses is another important threshold to pass. Our minds have a lot to say when it comes to our success or failure!

I have been guilty of waiting for stock to come back up to my buying point on many occasions when I first started trading. Then after a certain point it seemed pointless to sell since the stock had lost so much value, but you have to do it anyways or else you lose even more money. I really liked the idea of being in a good state of mind when trading, you are less likely to trade on emotion and make better decisions trading.

Why Traders Fail: 3 Major Failure Points to Avoid

Trading seems so easy. just follow the rules of a proven trading system. Then why do over 90% of traders fail? This post will show you why and more importantly. how to beat the odds.

By: Hugh Kimura | Updated: February 21, 2020

Why do most aspiring traders fail?

Studies show that over 90% of people who start trading will quit before they become consistently profitable.

That’s a huge failure rate!

My mission is to help you overcome the odds and become consistently profitable with your first trading strategy.

One of the first steps to becoming consistently profitable is to understand why most traders fail.

…then avoid doing those things.

In this short post, I’ll give you the three primary reasons and how you can avoid them.

1. Not Testing Before Trading Live

Most aspiring traders get all excited about the potential to make millions of dollars in their underwear and more importantly…the opportunity to tell their boss to put you know what…you know where.

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So they take a huge chunk of their savings and put into their trading account.

Then they take the first trading strategy video that they see on YouTube and start trading that strategy in their live account.

…and they wonder why they lose money.

  • Would you be able to play in the NBA if you just learned to shoot a basketball last week?
  • Would you be able to be a Formula 1 driver if you never drove karts as a kid?

The same goes for trading.

Luckily, it’s possible to become a consistently profitable trader in anywhere from a few months to a few years. You don’t need to have decades of practice.

However, if you want to become successful in a short period of time, you do have to test your strategies before you risk real money.

There are basically two types of testing…

Backtesting

This is not just for automated traders.

Manual/discretionary traders should backtest too.

Backtesting shows you what to expect from a strategy and gives you a database of trades to compare to your live trading results.

Beta Testing

Once you have a strategy that works well in backtesting, it’s time to do some beta trading, also known as forward testing.

There can be differences between backtesting and live trading conditions, so a beta test is essential to uncovering any blind spots.

Learn how to beta test in this complete guide.

Once you have a strategy that passes both tests, you will have much more confidence that your strategy will work with real money.

2. Not Reviewing Detailed Trade Metrics

Another reason that traders fail is because they do not keep an effective trading journal. Solutions like MyFxBook are not enough.

Keeping a journal may sound daunting, but it doesn’t have to be.

This is where a trading journal is essential to figuring out what you are doing wrong.

Keep metrics on your backtesting, beta trading and live trading. It doesn’t have to be complex, you can use a simple spreadsheet.

If you want more advanced trading metrics, use RazorJournal.

Here are a few blog posts that will help you keep more useful stats:

3. Not Focusing Enough on Trading Psychology

In my experience, trading is 80% psychology and only 20% strategy.

Most beginning traders focus 80% of their efforts on a trading strategy…and that’s a major reason why they fail.

If you still think that trading psychology is not important, then consider these 3 common trader downfalls…

Lack of Tenacity

Success in trading comes down to the ability to stick with the learning process until you are successful.

This means enduring the inevitable drawdowns and…sometimes blown accounts.

(But if you follow the tips in this post, you can almost eliminate your risk of a blown account)

Trading is not as easy as it seems.

Tenacity implies the use of force and will power. But ironically, the most important step to developing tenacity is actually forgiveness.

Read more about how forgiveness does that in this post.

Lack of Discipline

Do you follow your trading plan exactly?

Do you even have a trading plan?

Traders who follow their plans have an exponentially higher chance of being consistently profitable, compared to traders who trade the SWAG strategy.

Then track your results and find out if you are following that plan.

It can be easy to think that you are trading your plan…when you are not.

If you aren’t following your plan, then figure out why.

The reason is usually related to traumas from your past.

See what I mean here.

Lack of Humility

If you get cocky, the markets will put you in your place.

Cockiness usually occurs on a winning streak, or when traders first start out.

Remember that the markets are much bigger than you and they don’t care what you think.

Successful trading begins with identifying potentially profitable situations, but that’s only half of the equation.

The more important skill is to understand when you are wrong and to get out with only a small loss.

This post will help you figure out where to set your stop losses.

A lack of humility only leads to overtrading and blown-out accounts.

Final Thoughts on Why Traders Fail

So those are 3 of the most common failure points when learning to trade.

These steps sound simple, almost too simple. But they can actually be very challenging to implement.

You have everything you need to get started in this blog post.

To get more advanced help with the actions mentioned in this post, join the TraderEvo program.

If you have any other questions about why traders fail, leave your question in the comments below…

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