Four Reasons Why Most Traders Lose Money – Introduction
A recent post by the European Securities and Markets Authority (ESMA) showed that most people who get into financial trading fail. The report placed that number at more than 90%. This means that most people who get into trading end up losing money. As a trading analyst and advisor, I have seen this situation first hand. The situation where people enthusiastically get into trading only to lose all their money within days. In this article, I will outline the four most important reasons why people fail in trading and how you can avoid this trend.
First is human psychology. While learning more about indicators and analysis is always a good thing for traders, the reality is that psychology is the most important thing for traders. Often, when a trader loses a trade, the first thought that crosses his mind is to open an opposite trade. In this, if they had a buy trade on crude, they are forced to open a sell trade with the aim of recovering the losses. What happens next is that they lose all the money because they did no analysis on the trade. Another way that this happens is when a trader opens a chart, sees an asset that is moving higher, and then decides to open a buy without doing any analysis. Again, the result for this is that they lose their investment.
Second is the performance chasing. This is when traders put targets on their trading. They can place a target of returning 10% every week. The implications of this is that they will always chase the 10% and if they don’t make it, turn to unconventional ways. A few years ago, my goal was to make $2000 every week. So, on a Friday afternoon, I was $20 short of the $2000. So, I decided to open a trade to gain the $20 only for me to lose more than $1000 in that trade.
Third is the ‘me too’ type of trading. This is a strategy where traders try to copy other traders or analysts. If you follow financial media like Bloomberg and CNBC, you have likely seen the analysts make their calls. If you are a new trader, chances are that you have traded as the experts have advised. A few years ago when I was starting to trade, I listened to a Bloomberg analyst who recommended buying crude oil. I rushed to my system and bought crude oil, only to lose a lot of money. While it is always good to listen to the analyst, you should always ensure that you do your analysis first.
Fourth is greed. As a trader, you have likely been in a position where your trade is going very well. It has done better than you had expected. Then, instead of shutting down the trade, you double down. You wait for it to make more gains. Another alternative is where you open a trade, make a profit, shut it down, and then without any analysis open the same trade. Often, if you do this, chances are that you will lose all the money.
Four Reasons Why Most Traders Lose Money – UsefulTips