Why do Traders Fail?

Unfortunately for a lot of people who start trading, the majority of them will find success difficult to achieve. Often quoted figures suggest that around 80% of traders fail in the market and higher figures are used when discussing futures trading. One can only wonder what the 10 – 20 % of people are doing right as opposed to the vast majority who leave the market with less money than what they had when they started trading. So what is it that separates the successful from those who fail? If you ask anybody who has studied trading for any period of time, they will answer ‘psychology’. They will add that ‘your psychology’ is what will make or break you as a trader. In short, your mental ability to manage losses and profits, the good and the bad times in trading, manage risk, to not become too greedy and many others are all encapsulated under the heading of ‘trading psychology’. An interesting observation can be made about traders generally either following or not following the rules. It is widely accepted that there are no secrets to what makes a successful trader and the rules that have stood the test of time and do work. Yet most people fail to follow them. Why?Interestingly, many studies suggest that humans are naturally inclined to fail at trading. People are naturally inclined to break all of the time tested trading rules. Probably the biggest reason for not following the rules is that people generally do not like to lose. Nor can they bring themselves to accept that they are wrong. As an example, there may be a certain type of person who is very confident in themselves and their own ability at different ventures, and this attitude and confidence naturally carries over to their trading. This potentially is a problem because there will be many occasions when a trade they enter does not head in the anticipated direction. The time tested rule of ‘cutting your losses’ would be most applicable however for those who have strong self-confidence may find it difficult to close the trade at a loss because doing so acknowledges that they got the trade wrong in their own minds. This may be a difficult situation to digest so the easier option will often be to not close the trade at a loss and therefore violate probably one of the most important trading rules there are. To most traders, the idea of not closing a trade at a loss means that they haven’t had a loss despite the fact that they may have a large unrealised loss. The bottom line is that humans are naturally inclined to break the time tested trading rules. If this is the case, then those who do succeed trading are totally committed to their trading and are able to focus on the task at hand. They are able to exercise great internal control and discipline and do as their trading plan would have them do. If you were to isolate the reasons why people do not follow the rules, you would most likely conclude that it is a lack of discipline and involving too much emotion in the decision making process.