What is your goal as a trader? To make $1,000 a month? $1 million a year? No matter how big your goals are, you have to start by not losing. You have to start by avoiding common mistakes that can take away your money, your confidence, and your pride.
So let’s go through 10 reasons traders why traders fail to make money. And as you read, think about if each one fits you.
#1: You Don’t Have a Trading Methodology That Matches Your Personality
What is a trading methodology? It’s a system for analyzing opportunities. It’s a set of tactics for buying and selling stocks, options, futures, crypto currencies, or whatever else you trade. If you’re buying and selling at random, you’re going to fail. But you knew that, right?
The key is to find a methodology-personality fit. You have to find a system that builds on your strengths and minimizes your weaknesses.
Two traders can use the exact same system and have very different results. Why is that? Because the more your method fits your personality, the more likely you are to follow it and succeed. Humans are not algorithms. We can’t just buy and sell without feeling any conflicts. So our system has to resonate with us. That’s the only way we’ll go along with it.
And if your method does not fit your personality, you feel stress. Anxiety. Confusion. And then you start straying from it.
I like to call myself a “cocktail napkin technician.” That means I value simplicity. My trading system is focused on identifying the trend and riding it as hard as I can. Everything else is secondary to my trend analysis core.
#2: You Don’t Want to Work Hard
There is no substitute for sitting down and working hard for years to master your craft. I call that “seat time.” Literally, the amount of time your butt is in your seat trading the markets and studying.
There is no guarantee of success in trading. That’s a hard pill to swallow. And to give yourself the best chance of winning, you must put in a lot of time and effort.
That’s the reality of anything worth doing in life, and it’s where true confidence comes from. If the idea of putting your head down and grinding away really turns you off, you are already setting yourself back from a psychological perspective.
#3: You Take Too Much Risk
In trading, we get rewarded for taking the right risks at the right times. But many traders are convinced they’re just one huge trade away from buying a new car or paying the kids’ college tuition. So they play two ways: big, or not at all.
But any time you chase a large reward, you also take a lot of risk. When the market goes your way, taking more risk actually pays off. So you feel more and more confident. But the minute things go wrong, your gains get wiped out.
You can go on a 6-month winning streak, only to give up all the gains in a week or two. Why? Because when you’re addicted to big rewards, the concept of risk management goes out the window. And you will be psychologically destroyed because you’ll look back and see where you went wrong.
#4: You Take Too Little Risk
There’s another side to the risk-reward equation. If you don’t take enough risk, you will never get rewarded. And what does insufficient risk-taking look like? Taking overly small positions, or not acting on opportunities when you see them.
Sometimes you need to push yourself out of your comfort zone, and get more aggressive. If you can’t ever do that, you may not be mentally up for the risks of trading.
But take your time. I’m now comfortable handling 30+ positions at once, but it took me many years to get there. Start small, and build up a little bit at a time.
#5: You Can’t Admit You Were Wrong
Traders like to be right. I know I do. But thousands of times a year, I have to admit I was wrong. I have to stop out of a trade because it went wrong, and I need to cut my losses.
You might be shocked at how much damage just one or two runaway bad trades can do to your overall P&L. So you must stand by at all times to hit the eject button and abandon a bad trade before it’s too late. Losing $500 on a trade stinks. But losing $50,000 stinks way more, especially when you realize you could have gotten out at that $500 loss mark.
#6: You Talk Yourself Out of Market Uptrends
You just learned how selling a bad stock too late can hurt. Selling too early can also cause you big problems.
This is most common during market uptrends. The S&P 500 will be trending above the 8 & 21 day moving averages with tech stocks and small caps leading the way (my kind of market). Yet many traders will sell strong stocks under the belief that “what goes up must come down,” or because of economic and political news. And they miss the ripest, juiciest moneymaking opportunities.
You’ll feel very frustrated when you look back and realize that you had no good reason to sell.
You just fell victim to external forces, especially sensationalism. You didn’t trust your system, which is a sign of a weak mindset.
#7: You Have Personal Issues or Health Problems
Life is a wonderful ride, but it’s not always a smooth one. We all have problems related to family, friends, and health. And they are going to impact how much money we make trading.
Imagine if you were going through a divorce, or if you had a heart attack, or if your daughter was in the hospital with cancer. If you think life changes and events won’t impact your trading, you are in for a rude awakening. If you are going through major life changes, consider scaling back.
#8: You Are Not Measuring Your Trading
It’s common for a trader to have no real knowledge of their numbers aside from their account balance and overall P&L.
It’s one thing to know that you were up $20,000 last month. But do you know exactly which stocks drove that gain? Which strategies? And do you know what failures prevented you from gaining $25,000 or $30,000?
You must know what is actually pushing your P&L up and down to make progress. Because when you know what’s costing you money, you can stop doing it!
#9: You Have No Daily Routine
Regardless of strategy or personality type, successful traders tend to be process and routine-oriented. Winners do the same things over and over again, and never get tired of them. When you are focused in this manner, you can direct your time and energy where it matters: in making decisions about your trading.
What’s kept me in the game since 1998? I’ve been focused on executing the right daily process since 1998. The process is where the money is.
If you have no structure in your trading, things will always feel chaotic, and you’ll feel drained because you have to make too many decisions.
#10: You Stop Doing What Works
Even when you are making a lot of money, you can fall into the trap of trying new things out of boredom, or because you think the grass is greener on the other side.
But if you are fortunate and hardworking enough to find a system that works well for you, resist the temptation to complicate things by adding new patterns, indicators, and asset classes to the mix. You are almost guaranteed to get better results from building on your strengths than adding more parts to the machine.