Why Traders Lose Money
Before you can begin to earn reliable profits as a day trader, it’s important to understand why traders lose money.
From the outside looking in, trading can look pretty easy. Look at some alerts, pick some stocks, and rake in the cash, right? Not so fast. As you’ve probably read, the statistics for failure in the stock market are pretty high: most traders will fail. But this isn’t because trading is incredibly difficult. Usually, the reasons why traders lose money are easy to identify, and happily, they’re surprisingly easy to remedy:
- They never learned the basics. The reason why traders lose money is that in their race to get trading, they neglected to properly learn the basics of how the stock market works.
Like in any profession, it’s vital to form a strong foundation before you get to work. If you want to be consistently profitable as a trader, the number one thing you can do is to take the time to learn the mechanics of the market. Familiarize yourself with the stock market, some trading techniques, and get plenty of practice by paper trading on StocksToTrade. Any knowledge you absorb will improve your chances of success.
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- No savings. Contrary to popular belief, you don’t need to have a massive account to start trading. After all, Tim Grittani, arguably one of the most successful penny stock traders ever, started with just about $1500 in his account.
However, you do need to be smart about what you do with your money as your account grows. You’re never going to improve your position in the market if you blow your earnings every time you make money. If you earn $1,000 on a trade and instantly blow it, you’ll be back to ground zero.
Smart traders see the big picture and reserve a good portion of their profits as savings so that they can gradually improve their position over time. They can increase their investments bit by bit. Usually, this corresponds nicely with their growing prowess as traders. Over time, these small wins begin to add up. This means that if you’re willing to delay satisfaction, as your earnings grow, you’ll be able to spend more on the things you want without draining your account.
- They don’t keep a trading journal. As you grow as a trader, you’ll progress through plenty of methods that don’t work, and some that do. But how can you discern the difference between what is working and what is not over time? Keep a trading journal.
As much as you might think you know exactly what is working, only time can really tell. By logging every trading day, including what you did, how you felt, and the results, you’ll really gain powerful insight on the methods and processes that are really serving your career. This will allow you to focus on what is working, and dismiss what is not.
- No guidance. You would never go to school and expect to learn without a teacher. So why do so many new traders try to attempt the stock market without some guidance?
Day trading classes and/or a mentor are pivotal in helping new traders find success. Classes can help new traders learn not only the basics but master different trading methods, which can help them build a repertoire from which they can begin to forge their own unique style.
A mentor is also key. A mentor is like having a “see the future” button that you can press on your own career. He or she is further along in their trading career, and they can give you both literal and anecdotal advice to help advance your career. They have hard earned knowledge and can guide you past common pitfalls and mistakes and help you find day trading success faster.
- They don’t do research. While the act of making a trade takes just mere moments, the research and planning that goes into a trade can span hours, days, or even weeks of tracking and monitoring.
Trading is a numbers game, and one of the secrets to success is using past information to make decisions for the future. When you look at how it has performed in the past, you can begin to make trades from a place of higher security and confidence.
It’s vital to research potential trades and scan the market with a tool like StocksToTrade. Often, this research will reveal information that will help you decide whether or not a particular trade is a good idea at this particular time. Being prepared is key!
- Fear of failure. Here’s a common phenomenon and reason why traders lose money: they are too afraid to fail. They are so scared of losing money that they only pursue trades and business deals that carry minimal risk.
While you should never be risky, you will need to step out of your comfort zone a little bit. To see rewards, you need to embrace–or at least become comfortable with–a certain level of risk. Risk is inherent to the stock market. However, one of the most powerful ways to mitigate it is to educate yourself and do plenty of research! This is the difference between risk and calculated risk, and can help you trade more confidently.
- They don’t learn from their mistakes. This might seem at odds with the last point, but really, it’s not. It’s a simple fact: while you need to have a certain level of comfort with risk in the stock market, you’ll never be totally able to avoid mistakes entirely.
You will make mistakes as a trader. You will lose money. However, to keep losing money over and over again, you need to learn from your mistakes. Sometimes, mistakes can be your biggest teacher: if you’re able to learn from them and avoid the same errors in the future, they can actually serve you well over time.
- They get complacent. As a trader, you need to be on your toes at all time. There is never a point at which you are done learning. Take, for instance, this example. Trader X becomes comfortable with a certain process and just keeps on doing it, not keeping track of how the market is shifting. He or she gets lazy about their research and isn’t so careful about scanning. After a while, they will start losing money.
Complacency is a common reason why traders lose money. When you stagnate as a trader, you’ll likely begin losing over time. Never get lazy in your research, and never assume anything is a sure bet. Approach every trade as if it’s your first, and research and consider it from every angle!
Conclusion: There are several common reasons why traders lose money. However, this doesn’t mean that they are insurmountable. As you can see by reading this post, traders can easily improve their odds of success by forming a strong foundation of knowledge and being diligent about their studies. It’s the small things that can make a huge difference in your trading career.