Why Most Traders Fail

Anyone starting their journey to becoming a trader will eventually encounter the claim that 90 per cent of traders fail to make money consistently. But why do most traders fail, and what separates those who succeed from those who don't? 

While the exact percentage is difficult to verify across all trading timeframes, experienced market professionals have been discussing the high failure rate among traders for more than a century.

Everyone aspires to be in the top 10 per cent who make money, but only some are willing to put in the time and effort to achieve this.

When I give a presentation, I ask those present whether they want me to teach them what the top 10 per cent of traders know or what the other 90 per cent know, and every time they say the top 10 per cent. The answer to understanding the 10 per cent is simple: look at all the books and courses available and don't do most of it.

To be successful, you need to do what most traders don't. This may seem simplistic because you don't know what you don't know. So how does an inexperienced person decide what to do amid the overwhelming amount of information?

In this article, I explore why most traders fail to make money consistently and, more importantly, what separates successful traders from the rest.

Why do 90 per cent of traders fail?

The high failure rate among traders is not a new phenomenon. As far back as 1909, legendary market trader W. D. Gann observed that more than 90 per cent of people entering the market without sufficient knowledge or study eventually lost money. His observations were published in The Ticker and Investment Digest.

Almost a century later, trading psychologist Mark Douglas made a similar observation in his bestselling book Trading in the Zone. He estimated that fewer than 10 per cent of active traders were consistent winners, while 30 to 40 per cent consistently lost money and another 40 to 50 per cent experienced cycles of profits followed by substantial losses.

Although these figures are based on the professional observations of experienced market practitioners rather than comprehensive statistical studies, they highlight an important distinction: making money occasionally is very different from becoming consistently profitable.

This raises an important question. If traders have access to more information, sophisticated trading platforms and market analysis than ever before, why do so many continue to struggle?

The answer lies in how traders approach the market, the strategies they use, their ability to manage risk and, ultimately, their trading psychology.

1. Lack of knowledge

The single biggest reason most traders fail to make money in the stock market is a lack of knowledge.

Poor education also plays a role because many seek to educate themselves but look in the wrong places and end up with a poor education.

Many refer to themselves as traders simply because they buy and sell shares. But when asked how they analyse the stocks they buy or sell, they say they read reports in newspapers and on websites and occasionally look at online charts with their broker.

This lack of knowledge can lead to poor trading decisions, such as following stock tips, chasing shares that have already risen sharply, overtrading or buying stocks without conducting proper analysis. The Australian Securities and Investments Commission (ASIC) highlights these risks in its article, Don't believe the hype: Common tactics to get you to invest in shares, warning investors about the influence of market hype and unreliable share recommendations.

When questioned further, many traders reveal that while they have a rough idea of the fundamental information needed to assess a stock, they don't understand how to interpret a chart. They also lack a trading plan and have little understanding of money management.

How educated traders approach the stock market

An educated trader understands the importance of developing a trading plan to analyse a stock, determine when to buy and sell, and how to manage the trade. They also implement strong money management rules, such as stop losses and position sizing, to manage the risk and assess the potential reward of each trade.

If you are serious about building long-term wealth in the stock market, I encourage you to read my 10 top share tips, which dispel many myths holding you back. While they focus on individuals just starting out, the tips also explain why many traders struggle to make money.

2. Unrealistic expectations

Trading inherently involves risk. Yet many people entering the market are willing to take significant risks, believing they are adequately equipped to trade after reading a few books or attending a weekend course.

Many seek instant gratification, plunging head-first into the stock market using complex strategies in the hope of making quick profits. Sadly, unrealistic expectations can lead to poor decisions and the loss of their hard-earned savings.

We are told that knowledge is everything, but in trading, applying the right knowledge is what matters. Strong bull markets can hide mistakes in judgement and weaknesses in a trader's approach, allowing inexperienced traders to make money through favourable market conditions rather than genuine trading knowledge or skill. 

Making money when most shares are rising is very different from trading successfully across changing market conditions.

Why trading should be treated as a profession

People often approach me wanting to learn how to trade, and most want it to be quick, easy and cheap. If that sounds like you, you may be setting yourself up to become part of the 90 per cent who struggle.

Let's get real. Would you go to a doctor who had only watched some videos or attended a weekend workshop? Would you get your car serviced by someone with the same limited training, or allow your children to get on a bus if the driver had only read a book about driving?

Getting a university degree takes three to four years or more, and that's often just the beginning of developing expertise in your chosen profession. Trading is a business, and anyone wanting to build that business needs to treat it like a profession, with the same commitment to learning, developing practical skills and gaining experience. 

Becoming an educated trader requires more than acquiring information. You need to develop sound trading strategies, learn how to apply them and gain experience managing trades through different market conditions.

3. The psychological factors affecting your trading

Learning to trade is relatively easy; the hard part is understanding your psychology because the nine inches between your ears will have a significant influence on 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 psychology influences how they approach the stock market, make decisions and manage their trades. Fear and greed are powerful emotions, and without the right education and discipline, they can lead to costly mistakes.

How greed leads traders to take unnecessary risks

To illustrate this, we receive many calls from people wanting to learn how to trade Forex. When I ask why, they often say it is because they don't have much money, which is precisely why they should be cautious about entering a highly leveraged market.

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 with only $2,000 to invest, they can generate significantly greater profits using leverage than by investing directly in shares.

For example, if they invest $2,000 in shares and the price rises by 20 per cent, they make $400. However, with 10-to-1 leverage, they could control a $20,000 position and potentially make $4,000 from the same price movement.

What many fail to consider is that leverage also magnifies losses. A 20 per cent fall in the underlying asset would result in a $4,000 loss on that position before costs, although margin close-out rules may result in the position being closed earlier.

This is why the Australian Securities and Investments Commission (ASIC) continues to warn retail traders about the risks associated with leveraged products. In the 2024 financial year, 68 per cent of Australian retail CFD traders lost money, with aggregate losses exceeding $458 million, including fees.

Sadly, the attraction of making quick profits can overshadow the risk of losing hard-earned capital. The market doesn't care how much money you have or how much you think you know. It simply moves according to market forces, regardless of whether you make money or lose it.

How fear leads to poor trading decisions

And here's the challenge: when you have limited capital, you may become more emotionally attached to your money because you cannot afford to lose it. If a trade moves against you, even slightly, fear can take over and lead to poor decisions.

Rather than following their trading plan, some traders begin watching prices constantly, reacting to daily or intraday volatility and making decisions based on short-term market movements. This can lead to overtrading, particularly when they attempt to recover losses.

Another psychological trap is the fear of missing out, commonly known as FOMO. This occurs when traders see share prices rising sharply and fear they will miss an opportunity to make money. Rather than waiting for their trading strategy to confirm an entry, they chase the stock, often buying after a substantial price rise. If the price subsequently falls, they may panic and sell at a loss.

New traders can compound these mistakes by exiting profitable trades too early because they fear losing the profits they have already made. 

These behaviours are well recognised among investors. Morningstar Australia explains how loss aversion can lead traders to sell profitable shares too early while holding losing positions in the hope they recover. It also highlights how overconfidence can encourage excessive trading and an underestimation of risk.

Fear can become one of a trader's greatest enemies, particularly when they lack confidence in their analysis, trading plan or ability to execute it. Greed may encourage someone to enter a trade without properly considering the risks, while fear can cause them to abandon their strategy once the trade is underway.

Ultimately, successful trading requires more than knowing when to buy and sell. It requires developing the discipline to follow a trading plan, manage risk and make decisions based on sound analysis rather than emotion.

What skill set do you need to trade successfully?

Becoming a successful trader requires more than learning how to buy and sell shares. You need the knowledge, experience and discipline to apply your trading strategies across different market conditions.

I believe the foundation of successful trading can be summed up in one simple formula:

Knowledge + Experience + Effort = Success

It's that simple. In my experience, competent traders don't attribute their success to luck. Instead, they develop their skills through three important steps:

1. Acquire the right knowledge: Learn how to analyse shares, develop trading strategies and understand money management.
2. Develop experience:  Apply what you have learned, practise your strategies and gain experience making trading decisions.
3. Put in the effort: Knowledge and experience mean little unless you are prepared to put in the work, follow your trading plan and continually improve your skills.

In my experience, developing the skills to become a competent trader can take two to five years, depending on the individual and the effort they put into learning and applying their knowledge. There are no shortcuts to developing the competence needed to trade successfully.

Why successful trading doesn't need to be complicated

The reality is that learning how to trade requires commitment and effort, but you don't have to be a genius or a rocket scientist to become a successful trader. In fact, sometimes it helps not to be a rocket scientist.

Many newcomers unnecessarily complicate trading, and I attribute this to two things.

First, parts of the financial services industry make investing in shares seem complex and mysterious, as though it is only suitable for highly educated individuals.

Second, some marketing companies promise quick wealth without knowledge, experience or effort. Their messages suggest that anyone can make money in the market after attending a seminar or purchasing a trading system.

But if making money consistently were that easy, why would so many traders struggle?

Successful trading isn't about finding a secret formula or the latest sophisticated strategy. It's about acquiring the right knowledge, developing your experience and applying proven trading principles with consistency and discipline.

Take the next step towards becoming an educated trader

If you are serious about learning to trade the stock market and building long-term wealth, my bestselling book How to Beat the Managed Funds by 20% provides practical strategies to help you analyse shares, manage risk and make more informed trading decisions.

Alternatively, you can develop your knowledge and practical skills through Wealth Within's trading courses, which teach you how to analyse stocks, develop trading strategies and manage your investments with greater confidence.

You can also read what our students have to say about their experiences by visiting our reviews and testimonials.