Why Do So Many Traders Fail?

Thomas Walker August 12, 2016 0
Why Do So Many Traders Fail?

The idea that 90% of people who take up trading fail and end up blowing their accounts is a commonly heard one in articles, videos and on trading forums. The exact number varies, with 95% and 99% also being commonly quoted, but the general idea seems to be that the vast majority of retail traders end up losing money and never succeed.

To start with, this statistic is very hard to source. Different brokerages give different figures for their proportions of profitable clients, and these are skewed by the time frame being assessed, the mix of asset classes in question and various other factors.

However it does remain true that a large proportion of new traders never manage to get off the ground. It isn’t hard to find a large volume of online commentary from people who lost out and wrote the whole concept off as a giant scam. A look at social trading networks like Etoro reveals an massive proportion of loss making accounts.

The likely major cause of this lies in basic human psychology. People come into trading looking for big, short-term profits. They want money now, and they aren’t prepared to invest time or effort in the education, be that self-education or something more formal, that’s essential to getting anywhere in the markets.

That means that a lot of these traders are going in far too inexperienced to ever stand a realistic chance of success. If you can’t read price action, analyse a chart or understand fundamental news releases, you’re going to get wiped out pretty quickly.

But even those who do take the time to study and learn still have another hurdle to overcome.

When people are trying to do something like lose weight, give up smoking or take up exercise, it’s quite common for them to give up after a short period of time. Activities like these don’t deliver their rewards straight away; it takes several weeks of dietary change or exercise before the body starts to seriously change.

Trading is much the same. You start out losing in demo mode, then ideally progress to breaking even and then profiting in demo mode before moving to a live account. But the way that trading feels completely changes when the money becomes real, and there’s a complete repeat of that process of building up to profitability once live trading starts.

It’s at this point when it’s really easy to throw the towel in. In my own experience I had nine weeks of live trading losses, wiping out a quarter of my account, before I broke back through my deposit and started profiting. Most people aren’t prepared to wait that long on top of the months of demo trading before it, especially if inexperienced trading takes their losses even lower.

On the psychological front, revenge trading is another common killer of accounts. This is where a major loss leads to an urge to ‘make back’ the lost funds, resulting in greater risks, larger lot sizes and a complete abandonment of rational strategy. Keeping a cool head is essential, as is knowing when to acknowledge that it’s time to walk away, do something else and return when the mind has moved past the emotional reaction.

It’s all too easy to dismiss the system as rigged when it takes far more effort, time and dedication to succeed than most people are willing to invest. True enough, some products offered by brokerages are just gambling, particularly binaries and some derivatives, but trading in of itself is a skill that takes serious effort to hone.

The fact that some countries, including the UK, treat the unfortunately named ‘spread betting’ as gambling doesn’t mean it actually is. It’s a far more involved and detailed system than a simple binary bet. There’s a lot more to it than just ‘will this market go up or down?’, which is nicely illustrated by comparing real technical trading on a market to betting on a binary derived from that market.

Trading will always involve losses. It’s impossible to be right all the time, and in the case of binaries, the words of Qui Gon Jinn certainly apply. “Whenever you gamble, my friend, eventually you’ll lose”. But most trading is a matter of skill and strategy, and with the right commitment and the right approach personally suited to your own psychology, risk appetite and aptitude, consistent profitability is certainly possible.

The fact that there are people who do it should be a sign that it can be done. The fact the majority don’t is more a reflection on them than on the concept.

This article does not constitute investment advice. Please see our full disclaimer.

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