Do you make these mistakes in Trading? Why most traders fail…

Reason 1: Trading without an edge

There is a famous saying in poker: “if you sit down at a poker table and don’t recognize who the sucker is, then it is you that is the sucker”, and so too in the financial markets… Trading is a negative sum game: for every winner there is a loser and both pay to play. To be a profitable trader you need to have an edge. If you have no edge and choose to trade then you become the sucker that profitable traders extract their money from. Harsh, but real.

Reason 2: Trading too large for an account size

Many amateur traders (and a few so called professional ones) take a gun slinging ‘all or nothing’ approach to trading. The problem with trading too large is that it is only takes a few adverse moves (or less) to wipe you out or put you seriously underwater. No matter how good the system or trader, nobody acting on legal information can guarantee the next trade will be profitable. History is littered with examples of traders wiped out by this ‘can’t lose’ mentality: Nick Leeson of Barings, Long Term Capital Management, Jerome Kerviel of Soc Gen, Kweku Adoboli of UBS to name but a few. The only certainty in the financial markets is that there are no certainties. Size trades accordingly.

Reason 3: Obsession over winning percentages instead of positive expectancy outcomes

Most beginning traders focus on winning percentage as a measure of success. They falsely believe higher winning percentages equate to greater returns in the financial markets. End result: losing trades are held too long in the hope of a turn around, winning trades are closed too quickly to book sure profits. This approach is fundamentally unsound: average and max winning trades versus average and max losing trades combined with win to lose ratio are far more important metrics to consider. To illustrate the point imagine a system with 95% win rate and wins .5 % on every trade… Sounds great… but what if we told you it loses 80% of your capital on losing trades. Many traders are employing systems and strategies such as this one without even realizing: they are sat on time bombs waiting to explode.

Reason 4: Over-trading and using too tight stops

Commission is a cost of doing business, the more you trade the more commission and slippage you pay. Many traders are over-trading and ‘churning’ their accounts. Stops are often set too tight in an attempt to maximize leverage while controlling risk. This helps to contain the size of the loss as a percentage of an account, however it is ‘death by a thousand cuts’: over time these accounts eventually fall to zero.

Reason 5: Guru-itus and acting on false beliefs

‘Guru XYZ said it was going to do this, so it must be true!’. This is a very dangerous way of thinking and can create devastating results for traders and investors of all sizes. One of Keynes most famous quotes was that ‘markets can remain irrational longer than you can remain solvent’. Never has this been more true than in relation to following guru’s opinions in the markets. No matter how rational or irrational the market, it is always the market that determines whether you make a profit or loss. Everyone gets to choose what they believe in the market: be careful what you believe.

If you would like to learn more about trading with a quantified statistical edge in the forex markets, enroll today in a risk free trial of our Trading Program and receive a copy of our electronic Trading Guide which covers advanced money management and a breakdown of our Trading Systems in detail.