Why Most Traders Lose Money

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Simpler Trading Team

Nov 30th 2022  .  6 min read

Why Most Traders Lose Money

Traders have never had more access to information, indicators, and knowledge about trading. Yet, statistically, over 90% of all traders aren’t profitable over time. Why? Many times it can be boiled down to two key elements: sticking to a trading plan and controlling emotions.  

There are hundreds, if not thousands, of trading strategies that can be used in different market conditions. Traders often have no problem making money with a particular strategy. Wherein lays the problem is adhering to their strategy or plan and keeping the money they make. 

In this blog, we’ll briefly discuss why using a trading plan can be beneficial and how traders can identify when they may be trading on emotions. 

Resolving these issues can greatly increase a trader’s probability of success, so read on!

Using A Trading Plan

Having a trading plan and using it significantly improve the odds of traders having any measurable amount of success. When considering a trading plan, two variables will determine the outcome of your trading performance. 

The first is to create a plan using a strategy that has been proven effective through trial and error. A proper trading plan should include your risk parameters, ideal entry, stop loss, and take profit(s) in alignment with your trading strategy.

For more information on how to find the best trading plan for you, check out the Simpler Trading Plan here!

The next step to an effective plan is to follow it. There are many reasons a trader may disregard their trading plan on a whim. Let’s take a look at some of the key contributing factors. 

Greed

Deviating from a trading plan typically stems from emotion. One of the most prominent emotions a trader will encounter throughout their career is greed. Both beginner and established traders must be mindful of greed. One of the determining factors as to whether or not a trader is successful is how they deal with greed when it rears its ugly head. 

For example: when a trader ignores a predetermined exit point on a trade in hopes of chasing profits, they violate their trading plan and will often lose out on the trade altogether. In other cases, a greedy trader may risk more on a specific trade because they have a hunch that it will be a winner. In both cases, greed and the failure to control emotions cause a trader to violate their trading plan. 

This often results in a drastically reduced probability that a trader will be profitable, as they have deviated from their proven trading plan. Traders who habitually violate their trading plan will inevitably blow out their trading account and have no one to blame but themselves. 

Remember, “bears make money, bulls make money, pigs get slaughtered.”

Taking profits at predetermined profit targets will result in consistent gains over your trading career. This is often easier said than done for even the more experienced traders but has been proven to be an effective way of growing your account over time. As the old saying goes, “a bird in the hand is worth two in the bush.” 

Revenge Trading

Another common way beginner traders lose money is commonly known as revenge trading. Revenge trading happens after a trader has lost money on a trade and is trying to recover that money in the next trade. In doing so, traders may enter a trade on emotion or manage an existing trade poorly. 

One way to refrain from trading this way is to do a temperature check on yourself after every transaction or during a specified interval throughout the trading session. 

You should ask yourself questions such as how am I trading so far? Am I following my trading plan today? How are my emotions concerning what has happened throughout the session?

Fear of Missing Out (FOMO)

AMC, Gamestop, and Tesla- These are just a few companies that regularly trend on social media and trading communities. At one point, the entire internet seemed to talk about the AMC short squeeze. There are thousands of potential trades in every trading session. It is not your job to catch them all! 

As a trader, it is your job to trade your defined strategy and ignore the rest. A clearly defined trading strategy will typically prevent traders from chasing a move in the market that has started without them. 

Because there is so much information available to traders at any given time, it can be easy to be distracted by “the next big trade.”

A successful trader is not like a dog when he sees a squirrel. A profitable trader goes into the trading session with a game plan and executes their goal regardless of outside influences.

Bruce Lee once famously said, “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” 

This is precisely how you should approach your trading. A profitable trader will have traded a single strategy/setup 10,000 times rather than 10,000 different strategies once. 

IT TAKES TIME 

Many traders expect to be profitable immediately in their trading journey, only to be reminded by the market that it takes time and experience before this is possible. To become a successful trader, you will need to go through every obstacle, and the market will not let you get by skipping any lessons. 

The market is an equal-opportunity dream destroyer, and all who wish to trade profitably must learn to navigate the markets accordingly. Successful traders make many of the same mistakes as new traders, but they quickly learn from their mistakes and do not give up. 

Lastly, losing money is ultimately a part of trading whether you like it or not, but the main objective is to be the best loser. How can you be the best loser? By minimizing your losses. The only way a trader can minimize losses is by sticking to their trading plan and avoiding trading on emotion at all costs.  

A successful trader understands this and does not let a loss ruin their day, week, month, year, or career

You live, you learn, and then you earn. 

Conclusion

To become a successful trader, you must first become the best version of yourself. You will have mastered your trading strategy and plan and learn to navigate your emotions. 

Many new traders focus on their strategy and trading plan and neglect the importance of emotions. Trading psychologists have noted that 80% of a trader’s success will result from the mental approach to trading, and the other 20% has to do with strategy. No matter how good your trading plan and strategy are, losing control of your emotions can be detrimental to any trader. 

Coming into each day with a complete game plan and refusing to succumb to greed, revenge trading, and FOMO will dramatically increase your probability of success in trading. 

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