Friday, June 29, 2012

Reason for Failure

On stocktwits everyone makes money which is strange since 80% or more of most traders supposedly fail.  So much is written about how to succeed.  But why do so many fail?  These are my thoughts:

1) Not consistent.  Trading requires a very strict philosophy, if not a set of rules.  Good traders sometimes break their own rules -- but they have a sense when to do so and only under extreme conditions -- and only after years of experience.  If someone is failing, I would guess the first problem is they are switching between different strategies or don't really have a main strategy at all.  Therefore, they don't know what works.  They may use a winning strategy that requires losing 50% of the time but perhaps they hold the losers too long hoping to break even and sell the winners too fast hoping not to lose the small gain.  So they either don't have a clear set of rules or they have a very clear set of rules but their emotions -  mainly fear -- are overriding their results.

Fear is a difficult emotion to overcome.  But there are methods to overcome the natural fear of trading.  First, the non-profitable trader must switch to a paper account.  This is not ideal as paper trading removes the fear of real money trading.  However, the non-profitable trader is on a road to ruin anyway.  The trader must then paper trade according to his plan, and not switch to live trading until he has demonstrated that he is capable of making money consistently.  The confidence of seeing the positive results will hopefully be maintained when switching to live. 

2) Boredom / Addiction

It is my belief trading is addicting.  Trading brings a rush of endorphins into the brain providing a high.  It doesn't matter if the trade is a winner or loser.  So waiting for one's setup can be sabotaged simply by the need for a rush.  And then, the breaking of the rules begins.    Good trading is often quite boring.  It is not for everyone.  My guess is many failed traders are prone to addictions -- and probably are addicted to other substances.  Or maybe trading is their singular addiction. 

The solution is take an honest assessment of your feelings during trading.  If one feels thrilled and electrified when hitting a big trade -- this is a red flag.  Do most people feel a surge of adrenalin when they receive their paycheck in the mail?  I doubt it.  Your job is to make money consistently or you will be out of work. 

Breaking one's rules to make a trade is a loss of willpower and can happen to anyone.  One helpful tip is to watch one's energy level.  Lack of energy often precedes these lapses.  Eating a snack can be surprisingly helpful.  My lapses have often taken place in the afternoon after I've gotten hungry.

3. Look at what consistent traders do:

They usually have very different systems but each sticks to his own plan.  They usually only trade a few select markets over and over.  Some only trade one market.   Focus.  Focus.  Focus.

They usually take losses.  Yes, they take losses.  But they don't dwell on it. Their winners are often much bigger. 

They are confident.  This comes from years of experience.  They don't worry about winning.  They usually don't celebrate big wins.  (But they sometimes do.)

They are consistent.  Making money consistently can seem boring.  You do the same thing over and over again.

They are connected to other traders.  I would think most good traders are always learning and tweaking because the market is probably getting consistently more difficult to trade.  However, the human brain must rule all trading activity and thus -- the market will always be inefficient -- allowing good traders to profit.

This is all for now.  I will add on later.

No comments: