Why 90% of Day Traders Fail to Succeed
I used to take part on online forums a while back and there’d often be discussions about the success or fail rate of day traders (traders hereafter). I think it’s safe to say that 90% of traders fail, and failure includes just breaking even or even being in plus but not by much. To succeed as a trader, you should be able to make a living off of it, even if it isn’t a comfortable living.
What Defines Success as a Trader?
Every trader is different. We all have different starting capitals, strategies, schedules, trading platforms, indicators, and the list goes on. But at the end of the day, our success is assessed by one simple measure and that’s if we are making money. Of course, your starting capital and the funds you need to make a living can make a huge impact for your definition of success.
If you only need $3,000 monthly to make a living and have a million dollars to trade off of, you only need $36,000 annually or a 3.6% annual return. Of course, I’m ignoring taxes for simplicity, but that’s not bad, although you’re doing horribly against any benchmark and probably should sticking your funds in an index fund for better returns. So in the sense of a percentage return, this trader would be a failure, but he’s still making a comfortable living.
My guess is that only 1% or less of all traders out there are tremendously successful. I’m talking about traders that can pull of 50-75%+ returns or bring in six figures with consistency. Consistency is key, since any trader can pull off one or two years of high returns but to keep doing it year in and year out is for those that are extremely successful traders.
Why does a trader fail? There are so many reasons such as being under capitalized, not having a sound trading system, no confidence, not enough tools, not enough research, no trading plan, taking profits too quickly, listening to other people’s advice, etc. And those are just a few reasons among many that I can name. And the problem is, you think you’ve taken care of one problem and another one will come back to haunt you, that’s the life of a trader. That’s why discipline is the most important ingredient to become a successful trader. I’ll go into a few of the reasons of why 90% of traders fail.
Not Enough Starting Capital
I think this is one of the major reasons most traders fail. Most traders start trading with minimal funds thinking they can make millions. Unfortunately, new traders think that trading is the next get rich scheme and jump in, only to lose their money consistently. They transfer $10,000 to their new trading account thinking it should be enough to be the next successful trader. They only want to make $3,000 a month at first but don’t even spend the time considering what kind of return that would mean on an annual basis. I mean, it’s only a 360% return right?
Not Having a Sound Money Management System in Place
Say this trader goes on a losing streak and loses $4,000 and his/her trading capital goes down to $6,000. A successful trader would cut back or stop trading until they’re on a winning streak before increasing their position size. But a trade who fails will double their position size, hoping to hit a jackpot and get back to their starting capital of $10,000. Well in most cases, they end up losing more or hit a margin call.
Take Profits Now! Let the Losers Run!
I’m sure you’ve heard it a million times. The old adage is, “Cut your loses and let your profits run.” Unfortunately, this is one of the hardest things to do as a trader. It’s hard for me, I hate taking losers and taking a hit in my trading capital it sucks and it hurts. On the other hand, when you have a winning trade, it’s so tempting to take profits and let the cash register ring. Only to see the trade go up another 50 points, which could have meant triple your profits within the next hour.
That’s just three reasons why 90% of traders fail. We traders have to deal with a lot on a daily basis. You could be doing so well and bang, some news in Australia might come out killing your profits and putting you in a sea of red. Some banker could say something really dumb to hurt a country’s currency or a natural disaster while you’re sleeping could wipe out every bullish reason for your trade.
Trading Isn’t For Everyone
If you’re considering trading, you should try a practice account first or if you can’t take that seriously, trade part time with funds you don’t mind throwing away. Don’t shoot for the moon, you might read stories about traders that made millions overnight, but chances are they were trading with tens or hundreds of millions, not $10,000. Don’t get me wrong, it’s possible to turn $10,000 into a million dollars, it just doesn’t happen very often. Just have a 100% return consistently for 10 years without withdrawing a penny and you’ll reach your goal.
Tomorrow, I’ll go into a little more detail about how much starting capital you need realistically before you really should consider trading.
Tokyo Sky photo by safetysession on Flickr.
