7 reasons why new traders fail
Most new traders fail to make money when trading. It is essential to know what these traders are doing wrong in order to avoid the same mistakes. We explain what not to do in order to be a successful trader.
Trading privately is probably one of the biggest ways to make money from the comfort of your home. The internet is flooded with tips and tricks on how to be profitable while trading, indicators and techniques to follow and even signals on when to buy or sell. Then why do so many traders still not “make it”?
1. Trading without a plan
Whether you are a Stock, Forex or Cryptocurrency trader, a consistent trading plan is of key importance to be successful. There is a saying that goes: “Failing to plan is planning to fail”. One will find that the top traders in any market never enter a trade without have a strict trading plan. This plan includes risk vs reward ratios, possible ROI’s, escapes etc. and incorporates almost any situation possible and how to react to it. Having a consistent trading plan will help you as a trader reacts to any situation the market throws your way as well as let you improve on your mistakes when the plan fails. It also acts as a method to keep you from making impulsive decisions which then depends completely on luck. If one does not follow a trading plan one may encounter the following problems:
- Slow or no growth
- Continuously making the same mistakes
- “Luck” trading/ Impulsive trading
Creating a trading plan may sound unnecessary to a beginner and be too much effort, but let us assure you, if you take this first step, you will quickly see its benefits and not be disappointed in the long run. To know more on how to create your own trading plan/ strategy, sign up to our free online trading course.
2. Connecting emotions to trading
As weird as this sounds, this is a massive problem in why most traders fail. A majority of traders, most usually beginners, makes the mistake of attaching emotions to the results of their trades. Trading should not influence one’s emotions at all. The thing is, the moment you attach emotions to a trade, your mind immediately gets distracted in one way or another. Having emotions influencing your thoughts will lead to less focus and you may then deviate from your plan. Most people do not realise that attaching your emotions to a trade is almost always non-beneficial in either way. Let us look at some examples, speaking from experience:
- If you lose a trade, you will immediately be disappointed and try to “fix “the loss. This then leads to you completely rushing a trade, putting more money on the line than usual, deviating completely from your trading plan and depending completely on luck. This is gambling. Let us assure you, that most of the time this does not work out in your favour and even if it does, you have learnt nothing by it and will just be more emotional on the next trade.
- If you win a trade, you will immediately be very excited, although there is nothing wrong with this and it is completely normal to be happy when a plan works out, this is not good for trading. This usually leads to you feeling overconfidence and entering more trades. These trades are usually not thought through as well and deviate from your plan or can even be in the wrong market conditions.
We can go on and discuss a lot more examples of how attaching emotions to your trades is non-beneficial, but we cannot hold you up the whole day. The point is, DO NOT attach emotions to your trading! If you ask advice by any professional trader, you will find that they will almost always refer back to this statement.
3. Having Unrealistic Expectations
Due to social media being flooded with traders, the luxurious life of some of these traders is not a secret anymore. The problem comes in when beginner trades see the lifestyle of some of these traders and expect to achieve this through trading alone and/ore in a very short time. They may also get the idea that trading is very easy and will make you rich very quickly. I am sorry to inform you that although this is possible, this is not the case for most traders.
The unrealistic expectations traders have about trading is quickly smashed as they enter the trading ecosystem. This in turns demotivates these traders as reality hits them and they eventually quit. It is important to remember nothing in life comes without hard work and effort. There is also no quick way to make money and trading definitely supports both these statements.
4. “Bad” trading practice
When we speak about bad trading practice, it includes all the “mistakes” traders make that eventually leads to them failing in the market. One will find that most of these mistakes can be avoided by keeping in mind the first topic we spoke about, A trading plan, as all of these sectors form part of this plan and is necessary for its success.
5. Risk vs reward
It is safe to say that risk management is one of the most, “looked over” activities when it comes to trading. Risk management is the process by which one sets up the risk you are willing to take against the reward therefore, such as take profit and stop loss regions. If you as a trader does not have risk/reward ratios incorporated into your trading plan, it will be very difficult to not only know when to take profits and/or set stop losses but also to minimise your risk by managing it correctly. Risk/reward ratios are highly recommended and can have a big influence on long term success. Having no risk/reward regions in trading can lead to some trades being held longer than needs to and eventually loses the trader money. Continuously repeating this process leads to traders failing in the markets.
6. High leverage
High leverage trading is another activity which leads to a lot of traders losing a lot of money and eventually quit trading. The fact that you can make large amounts of profits on small initial investments usually sounds like a great deal, but if these trades do not go your way, you could easily lose massive amounts of money and even get liquidated. It is very tempting to know that you can make much more profits than you currently are on trades, but it is strongly advised to not trade with leverage if you are not an experienced trader. Do not fall into the trap of thinking you will make money faster this way.
Overtrading is a very common problem where a trader places too much trades, usually unplanned, in a short time period. This can be due to many reasons such as a trader trying to make up money that was lost by previous trades, a trader seeing multiple potential trades at the same time and does not want to “miss out” or even a trader which cannot wait for a “good” trade and tries to enter every move. When overtrading, one usually does not set up a trading plan as there is “no time”, or even if one does, it is very short term and not well calculated. Overtrading to make up losses is never advised as this just again shows that one either attaches emotion to their results or that one does not have the patience and or experience to wait for the right time.
There is obviously a lot more reasons why traders fail, but if you focus on not making the mistakes discussed in this article, you are already ahead of the game.
Now that you have been through this article, we hope you as a trader now know which mistakes not to make to stay profitable in the markets. It is important to always keep a clear mind and not attach emotions to your trades and critical to have a trading plan. We wish you all the best in the markets and hope you can take something valuable from this article with you throughout your trading career.