Trading the markets might sound like a dream for many people, but in truth, it requires discipline, consistency, and emotional intelligence. While many people dream of being a successful trader, the unfortunate reality is that most people will never end up being profitable.
The good news, however, is that the reason most people aren’t successful isn’t that they’re unlucky, but because they have a few bad habits that are holding them back. Here are the major hurdles that end up holding back most traders (and see for yourself if you can notice the pattern).
Not Sticking to your Rules
Discipline is key for any trader, and the biggest mistake unsuccessful traders make is that they don’t stick to their rules. Come up with a strategy beforehand, make sure you’ve tested it on paper for at least a couple months profitable, then stick to it. Have a maximum loss amount that, if you hit, you walk away. Made five bad trades in a row? Walk it off and come back another day. Do you know when to take a profit or a loss on a trade? Whatever you decide to do before the markets open, stick to it.
At the same time, traders need to understand what their ideal trade looks like. For a small cap day trader, it could mean knowing what your ideal company looks like in terms of market float, price movement, technical indicators, news announcements, etc. When in the market, stick to what you know and are experienced with, especially if you’re a beginner struggling to be consistently profitable.
Even if you have a trading strategy and a well-implemented plan, the second most common thing that gets traders is a lack of patience. Most traders are too eager to jump in and trade low-quality setups out of eagerness. However, jumping in too soon on poorer trades increases your chances of taking losses. Instead, traders should be willing to wait for the perfect opportunity before jumping into the market.
Like a fisherman waiting for the perfect catch, traders should be willing to wait for top quality setups, rather than risking their capital on trades that aren’t the best because of impatience. Many times, this means not making any trades at all in a day, and that’s a possibility that successful traders are willing to accept.
People also refer to this as the “fear of missing out.” That by turning down less-than-perfect trades, they feel that they are missing out on all the profits that others are making. In reality, FOMO is a trap that many fall victim to. Don’t let it be you as well.
Trading is stressful, and it’s easy to think the world’s ending if you had a bad day or that you’re a fantastic trader because of one excellent day. The truth, however, is usually somewhere in between. Getting overconfident and excited can make you less disciplined and ignore doing your homework. Perhaps a big loss that was out of your control has made you scared of trying again the next day.
But arguably worst of all, anger and frustration can make you do stupid things, like doubling down on a losing position hoping it’ll make a jump back or getting desperate and taking positions you wouldn’t otherwise take.
Emotions are the enemy of successful traders. It’s the people who can keep their feelings under control and look at the markets dispassionately that will pull ahead from the rest of the pack.
Forgetting the Risk/Reward Ratio
Unprofitable traders often trade too big and risk too much to make too little in return. Often taking small profits while staying in losing trades for far too long hoping that they will make their money back. Instead, traders need to understand that importance of the risk/reward ratio when they are trading. For every dollar they risk, they should aim to make 1.5 to 2 dollars in return. This way, even if they are right less than half of the time, they still break even or make money.
If your profit to loss ratio is too low, you’ll need to be far more accurate to be profitable, which is unrealistic. Winning trades should have a massive upside and a limited downside. If you look at your trading history, you can find out for yourself what your ratios are, and if they aren’t good enough, they could be the main reason why you’re struggling and a sign you need to change your strategy.
If you haven’t noticed already, all of these things are mental and emotional. The biggest problems holding a trader back from success is themselves and how they react. In contrast to most people trying to dabble in the markets, successful traders know themselves, how they react, their emotions, their strategies, and have plans set in place that they follow through on regardless of how they feel. Taking these things into account could make all the difference between another person who lost money trading the markets versus a consistently profitable trader.