Trading the Stock Market – Why Most Traders Fail
By Dale Gillham | Last Updated 26 October 2018
Anyone who starts down the road to becoming a trader eventually comes across the statistic that 90 percent of traders fail to make money when trading the stock market. This statistic deems that over time 80 percent lose, 10 percent break even and 10 percent make money consistently.
An interesting point about this statistic is that it is not based on geographical region, age, gender or intelligence. Everyone aspires to be in the top 10 percent who consistently make money when trading the stock market, but few are willing to put in the time and effort to achieve this.
When I give a presentation, I ask those present if they want me to teach them what the 10 percent of traders know or the other 90 percent, and every time they say the 10 percent. To me, the answer to understanding the 10 percent is simple - all you need to do is look at all the books and courses available and pretty much don't do most of it.
To be successful in trading the stock market, you need to do what the majority of traders don't do. This may seem like a simplistic view, after all, you don't know what you don't know. So how does an inexperienced person work out from the overwhelming load of information out there what they should be doing?
In this article, I will explore why most traders fail to make money consistently when trading the stock market and, more importantly, what to do to avoid being part of the 90 percent. I will also given you an overview of what the 10 percent of traders who are successful do.
Three basic rules to successfully trading the stock market
Basically, to become a successful trader the equation is really quite simple:
Knowledge + Experience + Effort = Success
No consistently profitable full-time trader has ever told me they got there through luck. All followed these simple steps:
Step 1: They acquired the knowledge
Step 2: Once they had acquired the knowledge they developed their experience
Step 3: Those two steps are of no use unless the trader is willing to put in the effort to achieve their trading goals.
Another statistic is that learning to trade the stock market is a two-to-five-year experience. There is no substitute for hard work and there are no short cuts to becoming a professional and competent trader. In reality, self-education requires both commitment and work. But you don't have to be a genius or a rocket scientist to achieve consistently profitable returns when trading the stock market. In fact, I think it helps not to be a rocket scientist.
What I have found is that many newcomers to the market tend to complicate the process, and I attribute this to two things. Firstly, the experts in the financial services industry who make investing in the stock market for the small investor seem complex, mysterious and only for those who are wise and highly educated. And secondly, the marketing companies who promote that they have all the answers to gaining riches with statements such as "no knowledge, no experience and no time. No problem. Really! In reality, all they do is fill their pockets from expensive seminars or DVD sets.
Lack of knowledge about trading the stock market
This brings us to the single biggest reason why most traders fail to make money when trading the stock the market: lack of knowledge. We can also put poor education into this arena because while many do seek out education, they look in all the wrong places and, therefore, end up gaining a poor education.
Many people I speak to refer to themselves as traders simply because they buy and sell shares. But when questioned about how they analysed the stocks they were buying or selling, many claim they read reports in newspapers and on websites, and occasionally looked at online charts with their broker.
When questioned further, they reveal that while they had a rough idea of the fundamental information they needed to assess a stock, they had little or no idea what they were looking at when it came to understanding how to interpret a chart. And none had a plan or understood anything about money management.
An educated trader, however, understands the importance of developing a profitable trading plan, how to analyse a stock to know why they are buying and selling, and how they will manage the trade. More importantly, they also implement strong money management rules, such as a stop-loss and position sizing to ensure they minimize their investment risk and maximize profits. In fact, I encourage you to read my 10 top share tips that will dispel many of the myths that are holding you back from achieving long-term wealth when trading the stock market.
Unrealistic expectations about trading the stock market
Trading the stock market inherently involves some level of risk. Yet the majority of people attracted to the market are willing to take higher risks, believing they are adequately equipped to trade after reading a few books or attending a weekend course. Indeed, many traders seek out instant gratification, plunging head-first into the stock market using complex strategies in the hope of profiting from their efforts. Sadly, many lose their hard-earned savings on unrealistic expectations.
We are told that knowledge is everything, but in the context of trading I believe it is the application of the correct knowledge that is everything. The streets are littered with wanna-be traders and in a bull market many are profitable mainly through sheer luck rather than good knowledge. Strong bull markets tend to hide mistakes in judgement and lack of knowledge, which is why I say that unless you have been trading the stock market successfully for more than two years, you cannot consider yourself a trader.
Every week I am approached by people who want me to teach them how to trade, and most want it to be quick, easy and cheap. If that sounds like you, then probability suggests that you are part of the 90 percent. Let's get real. Would you go to a doctor who has only watched some videos or attended a weekend workshop? Would you get your car serviced by someone who has done the same or would you allow your children to get on a bus if the driver has only read a book on how to drive?
Gaining a university degree takes three or four years, or more, so you can get into your preferred profession. Similarly, trading the stock market is a business and those attempting to create that business need to treat it like a profession. Failing to give it this sought of respect is a major reason why most traders fail to make money when trading the stock market. To be an educated trader you need to combine a high level of knowledge with experience; otherwise, your probability of success over the longer term is very low.
The psychology factors affecting your trading
No matter why you trade, learning to trade is the easy part; the hard part is understanding your psychology - because it's true, the nine inches between your ears will determine your success as a trader. If lack of knowledge is the main reason most traders fail, then psychology comes in a close second.
A trader's attitude or psychology determines not only how they approach their trading, it also determines how they will approach the stock market. The emotions of fear and greed drive traders and investors alike, and without the correct education these emotions are often amplified, which leads to costly mistakes.
To highlight this, we receive many calls from people with no knowledge or experience wanting to learn how to trade Contracts for Difference (CFDs) or Forex. When I ask why, they often say it is because they do not have much money but this is the exact reason why they should not be trading CFDs.
The rationale of people who tell me they have very little money to invest but want to trade highly leveraged markets generally stems from greed. They believe that if they only have $2,000 to invest , their return on investment in a leveraged product will result in more profits than if they invested directly in the stock market. This is is because if the stock rises by 20 percent they will only make $400 but when leveraged 10 to 1, they will make $4,000. Therefore, in their mind the desire for quick returns is worth the risk although, in saying that, they rarely, if ever, think about what they could lose.
Sadly, while this is a romantic idea, it is a fallacy. The market doesn’t care how much you think you know or that you might only have a few thousand dollars, it just does what it does irrespective of whether or not you make money when trading the stock market.
And herein lies the challenge: if you do not have much money you tend to be more emotionally attached to it and, as such, cannot afford to lose it. Therefore, if the trade goes the wrong way even slightly, the fear of losing kicks in strongly, which often results in poor decisions and losses.
Individuals then end up taking a micro view of the market by watching their trades daily or even intra-day, or, worse, they make their decisions based on the short-term market volatility. This leads to an even bigger sin of over trading, as individuals chase the market in an attempt to regain lost capital or profit.
Those new to trading the stock market further compound their mistakes by exiting profitable trades too early for fear of losing their profit.
Fear is the biggest enemy of those wanting to trade because it is a much stronger emotion than greed, and it stems not only from a lack of knowledge or confidence in the individual’s trading plan, but also their inability to execute the plan successfully. Fear only kicks in once a trade is placed—what leads us to that point is greed or the desire for quick and easy returns.
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