Success for a trader is just momentary—a profit target hit or a winning month, before the next good trade must be found. But failure is the trader’s constant companion; moments of success are often intertwined with years of failure and hard knocks.
Traders spend more time picking themselves up, dusting off the dirt and giving it another go than they actually do winning.
This is particularly true of the emerging trader, whose apprenticeship may last for years before they fully discover their capabilities. As you know, the market is a harsh taskmaster.
But if you can avoid some of the pitfalls that entrap the unwary trader, your path to trading success can be much shorter.
Here are six common causes of failure and how to avoid them.
Imagine it’s the first day of your trading career. You have struck it lucky and got a job with a major bank working on the dealing desk.
You roll up to work and get shown to your desk, along with a few other bright-eyed recruits. You all log on to your computers, and there it is, the moment you have been waiting for – your demo account!
Of course, this is not going to happen. You get a job at a bank, and you will be given real money to learn your craft with. They are far more likely to give you a million dollars than they are a demo account.
Experienced traders know that the difference between demo trading and real trading is so great, that to spend months trading on a demo account is not going to help you be successful. Instead, you need to practice in a controlled manner with real money.
Let’s look at another scenario to illustrate the point. Imagine two traders. One places 100 trades on a live account, while the other places 100 trades on a demo account. Who do you think is going to have made the most progress in their trading career? Of course, we all know the answer. It’s intuitive. You have to play the game under the pressure of the moment to accelerate the learning curve.
Many traders will give you excuses as to why they should demo trade, some of which on the surface sound reasonable.
- I don’t have a winning strategy
- If I can’t make money on a demo account, how can I make it on a live account?
- I’m not comfortable live trading yet
But these are simply justifications to avoid doing the hard work and taking the calculated risks with real money needed to actually learn the craft of trading.
Behind all these reasons is fear of loss, and you can’t operate out of fear if you expect to win in the markets.
There are still reasons to use a demo platform from time to time, but they should never be used as an excuse to avoid live trading.
Trying to make money
Why is trying to make money a bad thing?
It’s not in itself, but trying to make money first is.
Let’s go back to our example of a bank trader on their first day. When you are given your $1 million to trade, you are not going to be expected to turn it into 10 million overnight.
Rather, your job will be not to lose it.
Too many traders come to the market with their eyes glittering, thinking about the profits. Instead, you want to be a risk manager first, and then worry about making money second.
Focus on controlling your risk and preserving your trading capital, before you worry about making any profits.
Trading too small
Another cardinal sin is that of trading too small.
Hold your horses! You may be thinking; didn’t you just say I should be focusing on protecting my capital? Should I not be trading small to do that?
And you would be right. The problem faced by traders is they then go and trade too small to actually take things seriously. If you’re trading one micro-lot and losing $10 a trade, then you are not going to give it the proper degree of attention.
Instead, you should be trading a size that you can actually feel.
Make sure that your positions are meaningful to you. I am not suggesting you should take a crazy amount of risk, but do trade at a size that keeps you engaged. Your positions should be big enough so that you feel each win or loss.
Trading too often
Overtrading is a key reason that traders lose.
Trading too often causes a number of issues:
- You end up with large losses in a short space of time
- You end up with correlated positions that all go against you at once
- You get confused about your trades
- You get emotional and trade rashly
You want to strictly control the number of trades you take. This is one of the first objectives you should establish when you begin trading.
Try taking one trade a day if you are day trading, or one a week if you are long-term trading. Day traders should have a max of 1 or 2 positions open at any one time. For long-term traders, keep it limited to 3 until you really know what you are doing.
Let me ask you a question. Which of the following traders is giving themselves the greatest chance of success?
A trader with $1000 in their trading account.
A trader with $10,000 in their trading account.
A trader with $100,000 in their trading account.
Of course, the answer here is intuitive as well. The trader who is properly capitalized is going to have a greater chance of being successful. I think this is perhaps one of the most underestimated reasons why traders fail.
A trader that is not capitalized ends up risking too much, can’t put stops where they need to be, and if they do make profit, it is going to feel meaningless. You know you are a trader when you can bring in several thousand on a trade.
Being undercapitalized means you can only target paltry returns, and makes it harder to get in the right mindset for trading to begin with.
Conversely, having a properly capitalized account does not mean you need to trade excessive sizes. It simply means you have the freedom to set worthwhile targets and manage your trades without fear.
It’s critical you remember that the one thing you are in control of when you trade is your position size. With more capital, you can craft much better positions (because you can survive a small news spike for instance).
You don’t control the market, but you do control your risk. Undercapitalized traders are not well positioned to take good risks.
Try allocating a maximum risk per month or quarter. For example, if you have a 100K account, you might risk a maximum of 3% per quarter. Then, if things completely turn to custard, your max loss is going to be 12% for the year.
By doing this, you can be properly capitalized and psychologically unburdened by the thought of blowing up your trading account. This strategy keeps you in the driving seat.
All or nothing trading
Ever had a position go your way, not hit the profit target, and then fall all the way back to the stop-loss?
Or perhaps you have had a trade go your way a little bit, then you have taken profit only to have the market continue on for a big move (while you are watching from the side-lines)?
These are very common problems. Not only are they not good for your trading results, but they can also play havoc with your psychology.
Traders who feel they have missed out sometimes jump in late on a trend, only to see the market reverse and stop them out. Or traders that have let a winner turn into a loser will revenge trade, and try to win back the profits they thought they had, only to end up compounding their losses.
The good news is the solution is simple; use a scale-out approach.
Take a little bit of profit when the market makes it available, take a little bit more when it hits your profit target, and then leave a little bit on for the really big wins.
This approach will not only solve these issues, but it will make your trading far more consistent.
Not following a process
The next reason why traders fail is they are not following a process.
Their trading is unstructured at best, and random at worst. Every trade you take should be part of a carefully planned process, designed to help you get from where you are now, to achieving your trading goals.
Firstly, you want to start with your best idea. Many traders have lots of ideas for how they want to trade. Write them all down, pick the very best one, and put the rest on the shelf. You can come back to them later.
Next, you want to write down a simple set of rules for your best idea.
Then you want to trade your plan at least 10 times, recording your results as you go. After all ten trades have been placed, conduct a review and decide on one or two (max) things to change.
Add those changes into your trading plan, and then go again. Place 10 or more trades, record your results, analyse, and make a small change. (Rinse and repeat.)
Can you see how, through this process of small consistent improvements, your trading will eventually get to where you want it to be?
Over to you my friend…
When you avoid the six obstacles outlined in this article, you’ll find your trading ascends quickly to another level.
It’s not easy. It takes hard work, discipline and a good deal of self-reflection to dodge these bullets. You may find you have resistance to some of the ideas here, or while you believe them, you may find that in practice you fail to execute.
If you need support, come join the trading tribe.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.