Trading in financial markets is often perceived to be a means for quick wealth. However, reality is far from that illusion. According to the real world, trading is not as easy; most people entering into trading end up failing. Estimates say it’s as high as 95% of those losing money, with a lot blowing out their accounts, failing prop challenges, or running funded accounts to the ground. This rate of failure is not only shocking but common among new and experienced traders alike.
The reasons for this high failure rate are varied and well-documented. In a 2010 study conducted by Barber and Odean, it was found that approximately 80% of traders quit trading within two years of operation, while 40% quit after only one month.
Indeed, it is a gloomy statistic that shows traders face tough times. Basically, these mistakes are perpetrated time and again by traders due to essentially being a function of human nature. As creatures of habit, traders are habituated into a number of repeated failures.
To break this cycle, it becomes paramount to identify and overcome the principal characteristics that lead to failure. These three include arrogance, greed, and disorganization. By conquering these attributes, a trader’s chance of succeeding increases exponentially. In this paper, each of the pitfalls is described in detail to help resolve them with actionable steps to increase the accumulation of successful traders on a long-term basis.
Arrogance is one of the most common characteristics of failing traders. It means one believes he knows everything about the markets. Overconfidence may arise, which misguides an individual due to a lack of respect for the complexity of the market—being overconfident in trading, where you face some of the smartest and richest people in the world, may lead to your downfall.
But the reality is that when traders are working with the view that they have everything figured out, they tend to take more unnecessary risks and are much less likely to pay attention to warning signs or adjust to changing market conditions. In this regard, this mindset does not only block the process of learning and growth but also sets one on the road to failure.
The Power of Education
The key to getting over arrogance in trading is education. Truly, no person knows everything there is to know about the markets, and the day a trader starts to think that he or she does is the day he or she will stop growing. Learning is constant. For as much as possible, traders should expose themselves to books, courses, webinars, and other materials that educate. Three important books that every trader needs to read are:
- Trading in the Zone by Mark Douglas: This is a book that deals with the psychology of trading and helps traders understand the mindset necessary to become consistent winners.
- What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan: Compares risk management foundation lessons with arrogance.
- Reminiscences of a Stock Operator by Edwin Lefèvre: A classic read that has so much to share with regard to the trading world, one of such things being the importance of humility.
It is through such education that traders will be able to familiarize themselves with the markets, their limitations, and ring in the steps they need to take in order to be successful.
Unrealistic Expectations Trap
The other significant factor that brings about the end of many traders is greed. It is an urge to acquire riches, usually extreme selfishness, and it sometimes leads to impetuous trading decisions. Greed will make any trader zero in on their reasoning by getting into the gambling mentality, whereas they are only concerned with the “big win” and not about steady incremental gains.
One of the most pervasive ways that greed expresses itself in trading is what’s known as a “revenge trade.” Following a loss, most traders become desperate to try to make up for lost ground as quickly as possible, hence making bad decisions and falling into even bigger losses. This vicious cycle can be very destructive to a trader’s account and may even result in a complete breakdown of his strategy.
The Role of Patience and Discipline
The antidote to greed is patience and discipline. It’s not about getting filthy rich with that one trade that will change everything; it is making incremental gains over time. For traders, this translates to an unrelenting focus on small gains taken incrementally and sound risk management, rather than huge profits.
Let’s take an example: say a trader can average a three-pip gain a day; over a month, this would amount to around 60 pips, and extrapolated over a year, this gain would be about 720 pips. That doesn’t sound like much, but through leverage, it can be an enormous sum. The idea, however, is that an individual must first become consistent before looking to gradually add leverage with growing confidence and skill.
These are things a trader could do to avoid falling into these pitfalls and have a sustainable trading career:
- Adopt a very disciplined trading regime.
- Look for incremental gains rather than get greedy over windfall profits.
- Do not fall prey to the temptation of making up losses by entering risky trades.
Disorganization
Another very common failing in traders is a lack of organization. When you are trading, you are moving very fast, so if you are not organized, you are a recipe for disaster. Like with a pilot or a surgeon, a successful trader will have an organized plan before and if they ever enter the market. That includes a plan for entering a trade and exiting a trade and a strict rule for managing risk.
Without organization, traders are more likely to make impulsive decisions, overlook critical details, and miss out on profitable opportunities. Disorganization also makes it difficult to track performance, analyze past trades, and identify areas for improvement.
Beating Disorganization with the Power of a Trading Plan
Traders combat disorganization by establishing a structured approach to their trading activities. This may be achieved by simply developing a trading checklist of essential elements of every trade. So, the trading checklist should contain the following:
- Entry Strategy: Clearly state under what conditions you are going to enter your market. What signals are you looking for? What conditions will trigger the entry of your trade?
- Exit Strategy: One should outline his exit strategy from the market. What are your profit targets? Where will you place your stop-loss orders?
- Risk Management: Decide the level of risk you are prepared to take on each trade and desires. You prefer to put a ceiling on the percentage of your account that you can afford to lose on a single trade.
A well-structured plan can help keep things in order, reduce emotional decision-making, and enhance general trader consistency.
Conclusion
The fact of the matter is that trading is difficult, and most traders don’t make it through. However, by knowing about the common pitfalls—arrogance, greed, and disorganization—traders can significantly improve their probability of survival and success. First, one has to realize that there is a problem and that trading is a continuous learning process, discipline, and keeping things in an orderly manner.
You can avoid the mistakes that cause so many other traders to fail by educating yourself, forcing incremental gains, and certainly keeping an organized trading plan. Remember, the only way you can definitely fail in trading is to quit. With the right frame of mind and methods, you can also be one of those 5% who constantly go home with profits. Keep learning, be disciplined, and keep working on methods of approaching markets—success will come with time.
