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Why is day trading failure so common?

If you have been around the trading and investing circuit for any amount of time, you have undoubtedly heard the statistic that 90% of retail traders will fail and not make any money. There is a ton of research and speculation as to the exact reasons why. Today, I will illuminate some of my findings on this very subject. Why am I qualified to speak about this topic? I have been trading for nine years, the last six of which have been profitable. I now teach new traders what it takes to become successful in these markets, hopefully, saving them from the same costly mistakes that I made along the way. I have worked as a mentor with hundreds of people in the past few years and have learned a few common themes along the way.

What do the failures have in common?

First off, the world of retail trading has grown over the years as people are attracted to the financial freedom that comes with trading successfully. It CAN be done. But, it is not easy. In the past five years, trading has become exponentially more difficult when compared to the previous 25 years. Industry regulations, high frequency traders (HFT), algorithmic trading and an increase in institutional activity all work against the retail trader on a daily basis. It is surprisingly hard to squeeze a few pennies out of the market here and there.

It is human nature to be greedy. Greed can be a great motivator. It draws young and novice investors to the markets like moths to a flame. The allure of high percentage returns and overnight millionaire success stories all play on our greed button. But what is it that makes people get so far, only to fall flat on their face.

 

Effort

Do doctors spend a few weeks at summer camp learning medicine before they go on to cut your heart open while you’re still alive and collect a few hundred thousand bucks a year for their efforts? No. Do lawyers charge you $500 an hour to get your murder rap reduced to a parking ticket because they read a book or two on the subject after taking some law classes? No. Both of these professionals toil tirelessly for YEARS in post grad environments learning the intricate nuances of their chosen profession. It becomes more of an art and their success is dependent on their ability to successfully express their knowledge in various, high stakes arenas. They worked hard to get to the top and their pay is commensurate. Why should anyone think that trading and making six or seven figures a year would be easier than that? If it was that easy, wouldn’t everyone just be a trader instead? There is no such thing as “get rich quick.”

 

Entrepreneurial spirit

As a trader, you eat what you kill. There is no safety net. Nobody else to blame a bad day on and if you call in sick, nobody else to fill in and get your work done so you can collect your sick pay. Trading full time is reserved for those who understand what it is to be an entrepreneur. You are on your own, the competition is fierce, and you have no safety net. If you like safety, stay in your cubicle mashing keyboards for the big corporations (all of which were likely started and still run by CEOs who were entrepreneurs themselves at one point, the 1%’ers that everyone likes to complain about making too much money. You want to whine about them taking home $300 million? Why don’t you go and start up a multi-national, billion dollar corporation with a product or service that will change the world, manage hundreds of thousands of employees and failures, and still beat out the competition to stay afloat?)

 

Undercapitalization

I can’t tell you how many people I have had that have approached me saying they are new to trading and want to start with $500 and immediately start trading for a living. The sheer ignorance of some people trying to jump in the foray is probably one of the leading reasons people fail. I understand trading is exciting and making a few bucks in your underwear at home beats going to the office, but let’s try to maintain a healthy perspective here. Remember the doctor and lawyer story? $500 is not going to cut it. If you don’t have the money that it takes to make more money, it is not a big deal. You should be paper trading anyways, at least until you have found a profitable strategy, understand risk management techniques and concepts, and can afford to trade without any mental constraints over losing your $500. Don’t be so naive as to think you can make a living flipping your $500 for income starting day one. Just save your money, trust me.

 

Mental capacity and confidence

This is huge folks. Some people are addicted to failure and have no clue. There have been so many books written on trading psychology explaining this exact phenomena. Have you seen the movie, “The Gambler” yet? Fear and greed are the two primary emotions that drive traders and ultimately, the markets. Mastering your emotions while trading is paramount to anything I can teach or tell you. Risk management is what helps us become self-sufficient traders, but without controlling your emotions, you have no chance. Understand that when bad things happen to us in the markets, it is not personal, it is not someone out to get you. It is just the simple fact that somebody executed a plan better than you did, and you lost. It happens. Learn to deal with losing. If you can’t handle losing, you will NEVER make it as a trader.

 

Trading is NOT black and white

People, trading is an art and not something that can be mastered by opening up a book of notes and following a checklist. This is one of the hardest and most common hang-ups I see in students. You MUST understand that there is no logic and that you can lose money even when you are 100% in the right. It happens, often. If there was a secret sauce, code or strategy out there that could make anyone an overnight winner, well, then the richest person in the world would be a trader and own 100% of the world’s equity with their unimaginable fortunes. But, since there is not, you must realize that it does not exist. Quit trying to tell me that all you need is a checklist to follow and execute so that you can be profitable. It does NOT work like that. I get it, I am a left brained person too, and had a hard time learning that the markets didn’t care. You want left brained comfort, be an accountant. The market does not care about your inability to comprehend or cope with irrationality. You will go broke trying to force your trades into a box. Each trade is a living, breathing entity that lives in a complex ecosystem to which nobody is a master.

 

Sheep

Lastly folks, don’t be a sheep. Strive to be a leader, not a follower. This is the biggest issue I see among traders. Everyone wants money handed to them. Hell, so do I. But, come on folks, it isn’t going to happen. Take some responsibility for your own financial freedom and understand only YOU can be accountable for your bank account, not me, not the President and not your mommy and daddy. So, why is this the biggest issue I come across? People all want to be handed that magic formula for success and watch the riches start pouring in, I get that. But, surely people/sheep can’t really think it’s that easy can they? Sadly, they do. When you are on your hunt to find a trading educator, mentor or community to begin your journey into this world, do NOT fall for the red light/green light nonsense. You will never become a self-sufficient master of risk, a profitable trader, or a rich guy when all you are doing is trying to mirror trade alerts. If you can’t ask and answer to yourself with 100% certainty, why you are getting into this trade, what your stop loss is and what size you should take as well as what your profit target will be, you have no business trading. We all started from scratch and in the beginning, using training wheels is fine, it’s necessary. But, don’t bounce around from “guru” to “guru” seeking riches by mimicking their trades. It just isn’t possible. Again, if it were, wouldn’t we all be doing it? Instead, focus on finding a place that pushes education and transparency. A place where people genuinely want you to succeed and are willing to share their tidbits of wisdom and insight for no cost. Those places exist, and I am happy to say that I am an integral part of one of the best that I have ever seen at Warrior Trading.

Where to go from here?

If you read this and haven’t become discouraged or disgruntled, you may just have what it takes. If you read it and hate me or the stock market, that’s okay, the world needs janitors, fry cooks, critics and armchair quarterbacks too. I don’t really care what YOU choose or decide because I have made my choice. If you are willing to expose yourself to risk, humiliation, humble pie and work your butt off while asking for more, then you are probably a lot like me and many other successful traders. Failure is an option, not a guarantee. It is a choice, not a destiny. Nobody tells me when to give up and nobody tells me that I can’t do something. I have spent my whole life refusing to fail. Did that mean I never failed? No, I have failed at so many things in so many ways it is painful to think about. Is it embarrassing? Not at all. It is motivating and reassuring. Every path that led to failure just meant that I was one step closer to the path that led to my success. I promise you, it CAN be done. Don’t be a sheep.

 

If you have questions about trading or anything I wrote, feel free to contact me anytime via email: [email protected]