Why Do Traders Fail?

In Blog by Michael Arnold

Popular Trading Statistic: 90% of Traders Fail. Is this statement accurate?  Where does the statistical data come from? Is there a registry of “traders” where records are kept from first trade to last? What if a trader stops trading after a year? His account is slightly profitable, but he has decided that he cannot make enough money and trading is just not for him? Has he failed since he is no longer a “trader” or has he succeeded because he made money? What if his account is breakeven? We take issue with the above statement, not in the actual statistic (We still have no idea if that actual number is true), but in the use of the word “trader”.  What makes a trader? Is it simply deciding to put on trade or two…or ten…or twenty? If one places a bet on the Yankees/Red Sox game, either with friend or at a casino sports book, is that person a gambler? If you disinfect a cut and dress it with a bandage, are you a medical professional? The conclusion we’ve drawn is that it’s a question of word choice. It is simply semantics. The statement should read, “90% of people that attempt to make money through retail trading, lose money net/net and give up on trading entirely.”   The perceived ease of entry into the world of trading, Step 1-Open an Account Step 2-Start Trading, seems to have given people the impression that becoming a trader is just as easy. It is not.

The least important action in becoming a trader is the opening of a trading account. The most important actions happen before the trade. Not only what happens well before the first trade, but before every subsequent trade that you make in your new “career.” The development of a trader’s mindset is elusive and critical. When you decide to attempt trading, you have embarked on a path where loss is unavoidable. There are no traders that experience 100% profitability. They just don’t exist. Trading is not about avoiding loss entirely, because it’s not possible. The only way to achieve zero losses is to not place a trade. The trader’s mindset involves managing, and more importantly accepting, risk. A real trader learns a high probability trading methods and places every trade presented by that method. A “risk per trade” level is decided upon on a monetary or percentage of capital basis. This means that a specific amount or percentage of the overall capital being traded is chosen based on an individual’s specific financial situation and that is all that is risked on a given trade. The professional trader’s first trading rule is “never increase risk, only reduce it.”

When most individuals embark on a journey of trying to become a trader (or begin investing, for that matter), they think about how much money they can, should, or need to make. This is why the 90% of them fail. The pain and stress of loss makes them question their research and makes them afraid to take the next trade. The 10% of us that have been successful in trading think about it from a perspective of risk and just let the profits come out as a result of proper actions. This 10%, once they’ve fully learned whatever high probability method they’ve decided to use, never fear the next trade. To them, loss is a part of the business. It is the pain that is part and parcel to the gain.  If you want to be one of the 10%, you cannot go into it thinking like the herd. Trader logic is not intuitive. It is learned. Prepare your mind to accept risk and loss before the trade begins and join the realm of the 10%.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results