Why Do Traders Fail?

Submitted by Sharemarket News on 4 May, 2011 - 13:37

Learn why traders fail.

The percentage of traders who fail is a daunting figure. The market has a sadistic sense of humour and traders often fail because they are not up to it. Randomness is a cause, and so is having limited trading experience. Telling the difference between random acts of the market and true lack of skill should hedge against both overconfidence and beating yourself in the head for things that are out of your control.

Let's take X, who is trading for the first time. Although he has a business degree, X has no trading plan. Despite this, X immediately buys 400 stocks. The market decides to play him a shabby trick, and allows him to rake in $200 after fees on this trade. When another trade goes in the same auspicious direction, X concludes at the end of the day that he has finally found his purpose in life, which is trading.

Trader Y on the other hand, has been trading for a number of years. In the wake of a string of losses, Y decides to scrap his previously foolproof method for a new, untested one.

X, who relied solely on random wins, is never heard from again. Skilled trader Y, too, was hurt for chucking an excellent strategy that is now incompatible with market randomness. Y adopted a new strategy and went back to square one.

In other words, the random market can create profits for unskilled traders and losses for experienced ones. A trading plan and risk management will help X develop a method, one that he can test and modify over time, reducing the impact of randomness. Tested methods on the other hand, should be analysed to figure out if resulting losses are simply due to market whims rather than lack of trading skill.