Trading the Stock Market – Why Most Traders Fail

Dale Gillham, Chief Analyst and Head Trainer of Wealth Within

By Dale Gillham |

Anyone who begins their journey to becoming a trader eventually comes across the statistic that 90 per cent of traders fail to make money when trading the stock market. This statistic deems that 80 per cent lose over time, 10 per cent break even, and 10 per cent make money consistently.

stock market chart of a stock

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 per cent and consistently makes money when trading the stock market, but only some 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 per cent of traders know or the other 90 per cent, and every time they say the 10 per cent. The answer to understanding the 10 per cent is simple - all you need to do is look at all the books and courses available and don't do most of it.

To be successful in trading the stock market, 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 determine what they should be doing from the overwhelming load of information?

In this article, I explore why most traders fail to make money consistently when trading the stock market and, more importantly, how to avoid being part of the 90 per cent. I will also give you an overview of what the 10 per cent of successful traders do.

Why do most traders fail when it comes to trading the stock market?

In my experience, three distinct factors keep traders from becoming consistently profitable over the longer term.

1. Lack of knowledge

The single biggest reason why most traders fail to make money when trading the stock market is due to a lack of knowledge. We can also put poor education into this arena because while many seek to educate themselves, they look in all the wrong places and, therefore, gain a poor education.

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

When questioned further, they revealed that while they had a rough idea of the fundamental information they needed to assess a stock, they needed to learn what they were looking at to understand how to interpret a chart. None had a trading plan or understood anything about money management. 

An educated trader, however, understands the importance of developing a profitable trading plan to analyse a stock to know why they are buying and selling and how they will manage the trade. More importantly, they implement strong money management rules, such as stopping losses and position sizing, to minimise investment risk and maximise profits. 

If you are serious about achieving long-term wealth when trading the stock market, I encourage you to read my 10 top share tips that will dispel many myths holding you back. While they are focused on individuals just starting out, the tips also help to explain why many traders experience challenges when making money. 

2. Unrealistic expectations

Trading the stock market inherently involves some level of risk. Yet most 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 instant gratification, plunging head-first into the stock market using complex strategies to profit from their efforts. Sadly, many lose their hard-earned savings on unrealistic expectations.

We are told that knowledge is everything, but applying the correct knowledge is everything in the context of trading. 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, so 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, probability suggests you are part of the 90 per cent. 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 to 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 do this is a significant reason 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.

3. The psychological factors affecting your trading

black board with the words change your mindset

Learning to trade is easy; 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 but also how they will approach the stock market. Fear and greed drive traders and investors alike, and without the correct education, these emotions are often amplified, leading to costly mistakes. 

To highlight 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 do not have much money, which explains why they should not be trading in this 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 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 because if the stock rises by 20 per cent, they will only make $400, but when leveraged 10 to 1, they will earn $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 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, often resulting in poor decisions and losses. 

Individuals then take a micro view of the market by watching their trades daily or intra-day, or, worse, they make their decisions based on short-term market volatility. This leads to an even bigger sin of over-trading, as individuals chase the market to regain lost capital or profit.

Those new to stock market trading 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 from 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.

What skillset do you require to trade the stock market successfully?

To become a successful long-term trader with the skillset to trade in all market conditions, you require:

Knowledge + Experience + Effort = Success

It's that simple. Every consistently profitable full-time trader has never told me they got there through luck. All followed these simple steps:

Step 1: They acquired the knowledge

Step 2: Once they had gained the knowledge, they developed their experience

Step 3: Those two steps are only valid if 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 no shortcuts 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. It helps not to be a rocket scientist. 

Many newcomers 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! All they really do is fill their pockets with expensive seminars or DVD sets. 

If you are serious about trading the stock market and becoming a consistently profitable trader, purchase my award-winning book Accelerate Your Wealth, It's Your Money, Your Choice. It is packed with simple yet powerful DIY trading strategies that will allow you to take control of your investments.

Alternatively, you can learn how to trade the stock market confidently and profitably with our trading courses. You can also check out what our clients have to say about our courses by viewing their reviews and testimonials.

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