Why Do 95% Of Traders Lose Money?

Last Updated November 16th 2021
18 Min Read

Is it true that 95% of traders fail?

Though not scientifically proven, the worrying thing is the percentage of failing traders could be even higher. 80% of traders give up within the first couple of years and, of that 80%, only 40% are trading every day.

Why do most retail traders lose money?

New traders receive conflicting messages from the trading community. On the one hand, they see the videos of top-performing traders standing on their yachts or next to a posh house. These traders talk about how they went from nothing to earning thousands of dollars every day, and, by the way, they have a high-ticket trading course that, if you buy it, guarantees you can do the same.

If becoming rich from taking a course was possible, we'd all be sailing on the Caribbean with a Martini in our hands, trading for a couple of hours a day and banking hundreds of thousands of dollars a year. Knowing how to trade and trading successfully are two different things.

The thing is, anyone can fabricate the truth and visit a yachting harbour and stand next to a boat. Anyone can fabricate online trading figures to look real. But sadly, new traders want to believe they are different and will become one of the 5% successful traders.

It doesn't matter if you are trading Forex, the stock market, or cryptocurrencies; the principles of trading success are universal.

The truth is that trading is challenging. It will likely be the hardest thing you ever try to do, and you will probably give up within two years and end up with less money than when you started.

The question is, "why is trading so hard?" And "why do so many traders fail?"

Novice traders start with a flawed, distorted overview of how to succeed as a trader. Expectations are high, and they think it's only a matter of time before they can order the Lamborghini. But, if your expectations are more realistic, you stand a much better chance of becoming a professional trader and raking in the money.

So, the purpose of this post is to explain precisely why so many traders fail and what you need to do to become a successful trader.

Contents

How To Understand Trading Behaviour

Human behaviour is entirely predictable, especially in regards to trading.

When price momentum spikes in the market, a buying frenzy occurs. People start buying as if their lives depend upon it. Prices push higher and higher, and people still keep buying.

But there comes a turning point when nobody is willing to pay the high price, and that's when prices come tumbling down.

What most traders fail to realise is:

  1. Price momentum does not last
  2. This scenario will happen again (many times)

But, right at that moment, FOMO catches hold, and traders dive into the market without weighing up the fundamental factors of why or why not to take a trade.

When the excitement passes, most traders are baffled, looking at their screens, assessing their losses, and wondering why they took the trade.

Think about it. If you are buying, let's say, a Forex currency pair, you speculate the price is rising, which also means you expect other people to buy after you. Other traders move the market (usually institutional traders), and behind them trickle the retail traders hoping for a piece of the trading action.

So, other traders create the uptrend because they are willing to pay a higher price than you. And, this is a crucial realisation because professional and institutional traders do not buy at higher prices. They wait for a better price. Meanwhile, retail traders scrabble around, paying higher and higher prices for something that is losing value, regardless of the market price.

Eventually, panic sets in and traders start dumping their trades or get stopped out because the institutional traders start selling, and the market swiftly reverses into a pullback. All those traders who bought at the highest price are guaranteed a loss.

When there is no one else to buy, retail traders panic and sell, usually losing money.

For example, let's look at Bitcoin and how the market historically responds to price momentum.

For a long time, nobody was interested in buying Bitcoin, other than a few savvy investors who saw the potential for cryptocurrencies.

But by mid-2017, Bitcoin hit the news with rising prices. Suddenly, the mass public became interested in buying Bitcoin, fuelled by rumours of an all-time high of $100k.

People bought Bitcoin at $9k, $12k and even $20k and then what happened?

By the end of 2018, Bitcoin was $3,500. Over that year, uneducated, terrified investors sold off their Bitcoin (BTC) at significant losses, many lamenting it as a scam.

Now, in November 2021, the all-time high for Bitcoin (BTC) is $68,789.63, more than trebling the high of 2017.

How Social Influence Affects Traders

Professional traders figure out that it's best to follow one or two strategies, have a trading plan and manage their risk. But another essential ingredient is to learn how to remain detached from herd mentality.

Following the crowd will always end with you losing money.

Despite your best intentions, you may find it hard not to react to economic news. The media tells us that Bitcoin is doomed or that prices will go to $500k by the end of the year, and it's like Chinese Whispers.

Suddenly, every trader, every Forum, every YouTube Video, and your friends are telling you to buy (or sell) Bitcoin. It's called "availability bias", which means we believe the things we hear most often.

Pulling away from the crowd mentality is tough to do but necessary to succeed as a trader.

Professional traders often take the opposite side of a trade, contrary to market influence. Does it work out every time? No, of course not. Hold your nerve and wait for the buying frenzy to build to a crescendo; that's about the right time to sell.

Here's the thing. If you take the opposite position to everyone else, stay quiet about it. If you tell your trading buddies or your other friends, you may face ridicule because they don't want to be proved wrong, and they are 100% caught up in availability bias.

Also, people dislike seeing other people succeed when they fail.

When Wall Street made a lot of money (billions) from the housing market collapsing, there were mass protests by resentful people angry at others profiting (taking advantage of?) a bad situation.

People prefer others to be the same as them, even in adversity. It's a social stigma if someone goes against the grain, which can be a tough pill to swallow for traders.

The most successful traders go quietly about their business, not sharing their ideas or bragging about how much money they make from trading.

If you've started trading, it may have happened to you.

You may have felt the unrelenting self-pressure to follow the crowd. There's kinship in sharing losses between traders, but that won't make you rich.

Herd mentality is a root cause of traders' 95% failure rates, and you may not even realise you are doing it yet.

Don't Miss: The Importance Of Trading Psychology

Is Trading A Numbers Game?

Many supposed trading experts suggest that trading is a numbers game, but it doesn't have to be that way.

Some traders manage to perform consistently, absorbing small losses with more significant gains. They stick to their trading plan regardless of results. They know when to quit and when to keep going.

Novice traders may be consistent for a few weeks or months, but a few bad trades push them into overtrading or backing away from trading—both of which are not a solution to improving trading results.

Think about the fact that when you lose, another trader wins and vice versa. Your losses are feeding the account of a trader out-performing you. OK, before you spiral into doom, this situation creates opportunities if you can remain objective.

Compared to institutional traders, fund managers, central banks, etc., retail traders are like tiny minnows swimming in a vast ocean with big, hungry sharks. The trouble is that novice traders try to meet the sharks head-on when the best way to approach the situation is to sit on the back of the sharks and follow their moves.

Learning to trade strategically is the only way to avoid trading sharks. You're only a number if you continue to act like an uneducated trader, swimming along with thousands of other traders, all doing the same thing.

10 Reasons Why Traders Fail

There are more than ten reasons why traders fail, but the below list are the leading contenders for the high failure rate in trading.

1. Failure To Commit To Daily Trading Practice

The vast majority of traders give up trading by year two. By year three, only 13% remain, dogged and determined to overcome the patterns of loss. But by year five, only 7% of traders are still actively trading.

Why do traders give up?

Committing to daily practising is easy when you are winning. But traders lose interest when they consistently lose every day. It's painful to watch your trading account diminishing, and the sense of failure drives traders to close their trading accounts.

Stickability is one personal trait that separates successful traders from losing traders.

Take heart that most professional traders struggled to make a profit for several years. But eventually, as long as you learn from your mistakes and commit to trading discipline, you can cross the line to consistently profitable trading.

2. Closing Winning Trades Too Soon And Hold Onto Losses Too Long

Novice traders don't trust their trades and, as a result, often close winning trades too early. They feel relieved to be out of the market, but it's quickly followed by disappointment when the trade plays out to their intended exit point.

Leaving profits on the table significantly impacts long-term trading profitability.

On the opposite side, traders hold on to losing trades too long, hoping the price will turn back in their favour. The act of closing the trade feels like a failure, but it isn't. Closing losing trades swiftly increases your profitability, and the more you do it, the easier it becomes.

The best trading mantra is "maximise your gains and minimise your losses." To develop this discipline, it can help to practice with a demo trading account.

3. Poor Money Management

Money management is key to long-term trading success, and it's a significant part of your trading plan. For instance, many traders risk no more than 1% per trade to minimise risk and protect their trading capital.

4. Most Traders Gamble Not Trade

If you're taking trades without analysis, you are gambling. Hopping onto a trade just because the price is rising or falling is not a good reason to trade. It's opportunistic and leads to long-term trading losses.

Prepare for every trade. Know the EXACT reasons you are taking the trade.

Successful trading is a learned skill, and that takes time and effort.

A gambling mindset is a core factor in why 95% of traders fail.

5. Traders Jump Strategies Too Often

Just because a strategy doesn't work a few times is no reason to replace it with another. When you keep switching strategies, you have no idea what works and what doesn't work?

Find one or two popular strategies, understand how and why they work and commit to applying them to your trading for at least six months. If your trades aren't winning, don't assume it's the strategy. Take a long, hard look at how well you are implementing the strategy. Are you disciplined, or are you taking shortcuts to trade?

Read Also: How To Identify Your Strengths And Weaknesses As A Trader

6. Traders Do Not Have A Trading Plan

A trading plan is a roadmap to success, yet few traders create a workable plan for trading. They wing it most days, hoping to find a good trade but not outline what defines a good trade.

A trading plan provides the structure for knowing what to do and how and when to do it. It will keep you out of trouble when you feel compelled to get into the market (when you really shouldn't), and it will get you out of a trade based on the parameters set out in your plan.  

Your trading plan can be as simple or as complicated as you wish, but it may include the following:

  • Your strategies
  • What time of day to trade
  • What financial instruments you trade
  • Trade entry and exit points
  • When to stop trading
  • Risk levels

Put a basic trading plan in place and anticipate an improvement in trading results.

7. Traders Do Not Learn How To Trade

A surprising number of traders do not commit to a trading education, which is crazy considering learning how to trade may be the hardest thing you ever do.

Why not learn how to trade from experts? There are thousands of videos on YouTube to learn trading methods and many low-cost trading courses. There's no excuse or reason to battle it out on your own because you're undoubtedly developing bad trading habits and failing to understand what works in trading.

Learn how to trade with a recognised trading expert, and your trading results will improve.

8. Traders Rely On Margin

Trading on margin for a novice trader is comparable to a learner driver having their first driving lesson in a Ferrari.

A vast majority of novice traders lose 100% of their capital in the first three months of trading. Leveraging margin may seem like an attractive prospect, but you can quickly end up with a margin call or, worse, end up owing money to your broker.

9. Traders Put Too Many Eggs In One Basket

Diversification in trading is a way to spread your risk. No matter how fantastic a trade may appear, refrain from piling all your money into it. If that trade fails, a massive chunk of your capital disappears.

If you trade stocks, select two or three from different industries, and ensure those industries don't follow similar market movements. When trading Forex, pick two or three currency pairs and make sure they don't correlate. For instance, even if one pair goes up, that still means one of the trades is guaranteed to lose when the other goes down.

It's lots of small, consistent profits that will grow your trading account, not the big winners.

10. Traders Rely On The Opinions Of Others

Put 1,000 traders in a room and ask for their opinion on one stock. You'll hear a broad range of views. Every trader is sure their idea is how the trade will play out.

Learn to trust your own analysis and instinct. Yes, it won't always work out but, over time, you will develop trading skills from relying on what you learn without the influence of other traders' opinions.

Take these top ten reasons why 95% of traders fail and eliminate them from your trading. By removing the primary causes of trading failure, you step up to the next level of trading proficiency.

5 Top Tips To Make Money From Trading

1. Trade With Discipline

A consistently disciplined trader is a successful trader.

Most new traders start with good intentions, but it turns pear-shaped when we lose focus on our trading plan.

Typically, novice traders have the most significant losses after a series of winners. A bit of arrogance and complacency kicks in, and you start risking bigger trades. It's not unusual to wipe out an entire days' gains on one end of day trade.

The more profitable you become as a trader, the more risk of undoing all of your hard work.

You may love trading and want it to be your life. Passion is great, but it can trip up even the best traders. Professional traders advise that it's better to remain as relaxed about your losses and your wins equally. Not at all easy to do, but something to see as a trading goal.

2. Research Your Trades

Study price charts and assess historical data.

Identify price patterns and learn how prices for a financial instrument react to economic news. Ignore what everyone else is saying and break down the facts based on what you learned in this post.

Trust the information you gather and stick to the trading plan.

3. Narrow Your Focus On What You Trade

If you are trading Forex, pick two or three currency pairs and learn everything about those pairs. Learn their patterns, their reversal areas, support and resistance and how the prices react to economic news.

Dig deep—the same with the stock market. Pick two or three stocks to follow and become familiar with how they move in the market and do the same for cryptocurrencies.

Most new traders spread themselves too thinly and try to trade everything that moves. It may seem counterintuitive to limit trading options, but you gain intense knowledge and can use it to your advantage when trading.

4. Have A Life Outside Of Trading

We get it; trading is incredible and exciting, and addictive.

Novice traders spend too long at their trading stations, and the brain cannot handle the prolonged focus. You may not feel exhausted, but information overload kicks in over long periods. After a couple of hours, your decision-making ability deteriorates, and you end up taking poor trades.

Take a break every hour and go for a walk or a coffee. Step away from your trading station entirely and talk to another human being.

If you are learning how to trade, read a book on trading or watch a video, but refrain from sitting staring at the charts for hours on end.

5. Buy An Index Fund

OK, it's not trading, but if you really cannot hack it as a trader, investing in an index fund can be an excellent long-term option.

Markets always tend to rise over several years (look at the S&P 500, for instance), so plan to hold the fund for at least 3-5 years. Don't panic when the market dips. It will come back up again.

Recap Of Why do 95% Of Traders Lose Money

The expectation of a luxury lifestyle brings thousands of new traders to register with a broker and start trading.

Despite multiple failures, traders hold onto the hope of their fortunes changing and dreaming of becoming successful traders.

If a trader makes it to the two-year mark, they stand a chance of becoming a profitable trader because many traders burn out in the two years.

After two years, trading discipline may be easier because you've learned that not having discipline leads to trading failure.

The definition of madness is to keep doing the same thing expecting different results, yet we see many traders doing this.

Commit to trading education and follow a successful roadmap for trading.

Learn from your mistakes, and don't let them make you feel like a failure. Learning to trade is highly challenging but can be done. There's no reason to be part of the 95% of traders who fail if your expectations are realistic and your sole purpose is to become a better trader.

If you're focused on how much money you can make from trading, you might as well give up now. The chances are, for the first few years, you won't make any money, you may lose most of your money, and you may wonder, "why am I trading when I keep losing?" Focus on mastering trading, keep learning and documenting your progress, and, at some point, you can become a successful trader.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Trading or investing in financial instruments such as stocks, Forex and cryptos may not be suitable for all investors. It does involve risk and the possibility of a loss of capital. There are no guarantees for profiting from cryptocurrencies, and it's advisable only to risk what you can comfortably afford to lose.

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