Last updated on July 3rd, 2020
There is a lot of value that can be obtained if we understand why there are so many losing traders. And, without question, the number of losing traders overwhelms that of those who are succeeding.
In 2010, University of California, Berkeley released a report titled “Do Day Traders Rationally Learn About Their Ability?”. The report was centered around the idea to “test the proposition that individual investors rationally speculate as day traders in order to learn whether they possess the superior trading ability”.
Obviously by doing this type of research they end up finding the chances of success for most people who take up trading and can answer the question of “do day traders make money?”
This is some of the information that was discovered:
- The majority of day traders quit relatively quickly (80% of all day traders quit within two years)
- Investors irrationally attribute success disproportionately to their ability rather than luck
- Many day traders are remarkably persistent in their day trading activity despite a history of losses
With those three points we can see the most people who take up trading quit, they think they are skillful instead of lucky yet have a history of losing.
You can also take the word of many trading brokers who report that losing traders make up the bulk of their clients…..statistics report about 95%. I think we can say, with a high degree of accuracy most traders lose money over time.
Our In-House Survey Was Not Shocking
When we survey people new to NetPicks, typically the number of people losing ranges from 88% – 92% at the time when they first come to us. I actually feel it’s a positive to have high numbers of losing traders. That might make little sense considering we’re in the business of training successful traders.
I realize though, for those of us who are successful, there has to be others that struggle. It’s a reality of trading. I am certainly not saying we never lose but successful traders have the three legs of trading (method, risk management, psychology) understood so a string of losing trades is just a part of doing business. Not everyone can get it right, and if it were so easy, as the cliché goes, everyone would be doing it. They clearly are not.
Let’s understand a few of the mistakes losing traders make – and how we should all commit to avoid these. Let the 88% – 92% lose – we want to be on the successful side. You are probably familiar with some of these if you’ve listened to us over the years. Most of it is worth repeating because honestly, most still have a hard time following these mantras.
Most Losing Traders Skip These 5 Steps
With our own survey with new members and with the information about trading success freely available, we came up with these 5 actions that most failed traders don’t bother with. There may be some that you already doing but like a recipe for a cake, leaving out one ingredient can change the entire quality of the finished product.
Look for a 65% winning percentage.
We call it “two thirds/one thirds” – this means the odds will always be in your favor to win on a trade, but you are accepting the fact that if you go for too high of an accuracy level (80%, 90%, etc…) your risk levels will be unacceptably high. I’ve seen plenty of people trade with 90%+ win ratios, only to wipe out weeks or months of gains with outsized risk.
This “two thirds/one third” has ruled the day for us for many years. Sure, it sounds great if you could have success 80% of the time or more, but it’s not going to last. This is a goal and an objective that can stand the test of time.
Accept reasonable average win to average loss ratios.
I know, constantly you read about how you should risk $1 to gain $3, etc. It sounds so great on paper but in reality I don’t know many traders who really, truly succeed with that. It just sounds good to say but tends to be unachievable for most. A closer reality? Reward/risk ratios from as low as 1:1, which is perfectly acceptable, up to about 1.5:1. Which means $1.50 target for $1 risk. And that’s at the top end of the scale.
With rule #1 above, a simple $1 risk and $1 reward can work beautifully.
Too often people think they can get that 2:1, 3:1 or better, but then their winning percentages fall too low – well below that 65% we discussed above. It’s simply asking too much of markets that are volatile and they’ll do their best to shake you out.
Embrace the Power of Quitting.
If you’ve been with us for any length of time, you know what this means. You have to find a way to stop over trading. You should only trade during the ‘prime time’ of the market you are tracking and always have your quitting point. For us when we day trade, it tends to be 2 winning trades + positive results = Quitting Time. If we get two winners but are still negative, we continue until we reach a hard stopping point, which is always time-based.
For example, most US futures markets tend to be valid to trade the first 2-3 hours, then fall into a rut and are not worth the effort. Crude oil futures work well from 8:50am EST – 10:30am EST and even if we’re not positive, that is our hard stopping point. This will make your life so much easier, plus smooth out your equity curve considerably.
This applies to ALL day trading in particular – Forex, futures and stocks. Swing traders, you need to limit your trades as well.
You must accept regular losing trades.
This ruins more traders than almost anything else. People hate to be wrong. You will be wrong – a lot – no matter how good your strategy performs. If a single trade is that tragically important to you, you find yourself sweating, cursing, pacing – then you are simply way over-leveraged or need to do a lot of soul searching before you continue.
You need to look at successful trading as how you did over 50 trades, 100 trades, or much more. One trade, two trades, etc. means nothing win or lose. Remember, all markets get streaky – good and bad. You have to be able to outlast the whims of markets you cannot control.
Can you trade your system correctly 25 times in a row?
I can almost guarantee you that virtually none of you have traded whatever system you’re trading, in a demo mode (but live in the markets), 25 times in a row following your rules perfectly. If you’re anything like me, who has time for that, right?
However, it’s another recipe for disaster.
You simply must demo trade, without putting real funds on the line, and do it 25 trades in a row without error. It’s no problem to have losing trades. The point of this exercise is that I guarantee you have not mastered the trading rules by watching a video or reading a book. Until you start to train your mind and develop some habits and instant instincts, you will lose money. If you can get through 25 trades following the strategy as documented, you are ready for real money.
Most will never follow this. Ask yourself, do you want to be the 8% -12% who succeed or do you want to be the masses who do not?
Does This Prevent You From Being A Losing Trader?
These five things can go a long way in helping you avoid being in the same group as most other traders. Knowing why traders lose money allows you to improve on the very things they fail at. The fact is that there are many successful day trader stories and many of them can be found in the various trading books that have been published.
You know success is possible because other people have done it.
The answer though is no, this won’t prevent you losing.
Knowing how traders make money and actually doing it are two very different things. Yes, your strategy matters. We feel we provide you with exceptional training and strategies. However, we can arm you with these tools, but you still need to execute. It’s important to acknowledge and even confront what stands in the way of success.
Trading is not a simple exercise although simple things like cutting losses and letting winners run seem to be easy to do. They are…and are not….at the same time. With work and determination though, you stand to possess a skill that can be used for life, from anywhere in the world, and completely within your control. It’s hard to put a price on that.