Often times people will go into trading blinded by the possibilities of wealth because the only exposure they have is of those most successful in the industry. This leaves new traders vulnerable to the looming risk involved in trading and the fact that most first accounts get lost and when that occurs, people give up the trading dream. Failure is not certain, but loss is – this article will cover some topics which I believe are some of the main proponents of what causes new traders to fail.
You cannot buy out of the learning curve
Many various websites promote unique trading systems with foolproof methodology to riches. While there are many very good products out there that are designed to give you a systematic edge, none will remove the need for you as a trader to learn and gain experience. If trading was dissolved down into a practice of following signals and profiting without risk, you could only imagine that everyone would be doing just that. If too many people are using the same signals, the edge will erode over time.
Use basic logic when evaluating trading systems and products. Understand how they are used and how they can give you an edge. If you are looking for a product that will allow you to cash in by following signals exactly, you will end up spending a lot of money in searching for something that doesn’t exist.
Too heavily attached to the capital traded
The attachment to money is one of the biggest downfalls for new and even experienced traders. Psychological effects of loss and profit are equally detrimental and cloud rationality when looking to follow your trading strategy. Never trade with an account that you aren’t wholly willing to accept losing. Try to avoid attaching winnings or losses to physical goods as this connection will further cloud your judgement and will scour your ability to trade effectively through rule. When trading, look at your account balance as a point system devoid of currency. In this game you win by accumulating more points and when you lose points always know that you can get them back.
Expecting rationality to make sense of the market
The market is and forever will be an irrational beast which cannot be deciphered by logic. This is particularly important when your trade which was executed by a logical decision making process goes against you. You cannot combat the market saying that it is incorrect and that the market will eventually fall back to logic and turn into your favor. This hard-headed approach well surely not allow you to excel as a trader and will cause bad trades to become terrible trades.
Accepting that you are wrong
Following back closely to my last point, you need to learn when to accept defeat when things are going against you, even if you think the trade was a “sure thing.” The market loves to prove people wrong and if your expectations for the trade becomes different, it is more often than not a good idea to exit a trade quickly and suffer small or moderate loss than greater ones. If you hold onto a trade that is going against you because you think the market is the one who is wrong and will eventually “fix itself” you will continue to sink further.
When trading it is ok to be wrong, even the most successful traders are often wrong. The best traders however know when to accept that they are wrong and start looking for the next winning trade. Failure gives a unique opportunity to gain new experience when you understand what went wrong and how you might be able to reduce or remove that failure in the future.
Trading without a plan or strategy
You cannot go into trading with the expectation for success without a thorough plan to how you will execute your trades. What is your edge? What are your entry conditions? When do you exit a trade? How much money do you allocate for each trade? These are all but a very small sample of questions that you need to have definitive answers for. Trading yields a tremendous amount of uncertainty and when the uncertain happens, you need to have an answer for how you will cope with it.
Start simple and write out your plan based on your observations through paper trading. Work and tweak your strategy for at least several months before taking it into a live trading setting.
Trading is competitive
Trading is an extremely competitive marketplace where you take to the same battlefield, and go against those with much more experience and resources behind them. This has a resemblance to the infamous battle of Thermopylae where a small number of warriors defended against the Persians for 3 days despite odds of certain immediate eradication. Although the Greeks did lose in the end, it showed how unique strategy and ability to adapt gave an advantage.
You can take this same approach to beat “the big guys” by taking advantage of your ability to be more reactive and nimble in the market.
This is but a small look at why new traders fail however I feel that these are some of the most important factors to analyze about yourself. Go in with a plan, learn from your mistakes and continue to grow and evolve as an adaptive trader. Take the long route as in the end it will serve you better – if you are looking for an easy way to make a lot of money I can guarantee that you will end your trading career with regret.