The Top 3 Reasons Traders Lose and Give up

FX:EURUSD   Euro / U.S. Dollar
1). Over-trading and Random trading. Most people and traders think in order to make money as a trader you have to be trading all the time. If you are simply watching the market, you are missing out, or not doing your job by not trading it. This leads to over trading, and trading randomly or outside of your edge. Any trades taken that are not apart of your trading plan and do not align with your clearly defined edge, should be considered random trading. This is common after losing, because the natural tendency to want to make back what you lost. This only compounds mistakes and adds to the losses, making it even harder to recover both emotionally and financially.

Being excited or eager to trade is normal, especially for beginners who are drawn to the profit potential. We are all in the market to make money, and if you are not in the market you are not making money. But more often than not, being out of the market is the right thing to do. It is often better to not make any money, than to lose it!

By understanding, developing, and only trading your edge you increase your likelihood of earning a consistent income. Remember, all edges have a failure rate between 40-60%. So it is important to not jump back into the market after losing, until the next time your edge sets up. If you do not know what your edge is, you should only trade SIM or not at all until you develop one.

2). Scalping or Not Allowing for Windfall Profits. There is an old saying on Wall Street "you cant go broke taking profits." But you absolutely can go broke by taking profits, primarily when your losses are bigger than your wins.
It has become common these days for people to advocate scalping. But they do not understand that the math is against them.

They think since the high frequency trading firms are scalping for ticks or a point, that they should too. But a retail trader cannot compete with these institutions. They have algorithms that can make 10 trades faster than you blink, pay minimal commissions, have direct access to the exchanges, hedge their trades, and often use wide stops and scale in to positions.

A beginner should never scalp, and even those with experience are better off swing trading as it offers a less stressful and less difficult way to trade profitably. When swing trading it only takes 1 out of 10 trades to offset all the losers and provide a profit. This is the complete opposite of scalping, where it takes 10 winners to offset one large loss. Or if you are using a smaller stop like twice your target (1 point target and 2 point stop), it still takes 2 trades to make up a single loss and a third to make a minuscule profit after commissions. What happens when you lose again? This cycle repeats over and over, and the trader dies slowly but surely from 100 bee stings.

3). Wrong Mentality. There are many examples of the wrong traders mentality which prevents success for so many. One of which is losing. Most traders do not like to lose, they see losing as a problem. They do not understand that losers lead to winners, and that losing is the natural cycle of trading and is imperative to a consistent return. You cant win if you dont lose!

Another example is emotions. Most traders see emotions as the enemy, that which stands between themselves and the market, and prevents them from succeeding. So they work to try and remove emotions. But this is not possible. As long as you are a human you will have emotions. You can never remove them. The key is to understand them, and use them to your advantage in the market. And when you are not in the right mental state, remove yourself from the market altogether.

A third example is fighting the market. This relates back to the first topic, over trading and random trading. Many traders do not realize the market does not always offer what they are seeking. A trading range is a good example of this. In a trading range, the market goes sideways there are many failures, and the market does not get very far. What happens to a trader who does not realize this? He continues fighting the market, looking for a large gain when the market is not offering one.

So it is important to understand your self and the market. Not just the market. You need to be able to realize when you should not be trading because your mind is not in the right state productive to trading. As well as knowing and understanding your edge, which also means the market context it works well in, and when it does not.

For more understanding on these topics and more, including how to develop an edge and how to better your traders mentality, see website below.

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Thank you so much for offering your thoughts and hard earned experience to the community of trading. Your articles are helping me to mature as a trader, hopefully reducing the harder lessons, and smoothing out the ride a little. Much appreciated, Tim.