I wanted to thank you all for your support on my last post. It's good to know that I am surrounded by some very intelligent people. However, reading responses to some other newbie posts is somewhat discouraging. There is an overwhelming tone of negativity on day trading in general for someone wanting to become a day trader. So I wanted to pose this question to you all: Why do most new day traders fail? I have heard on this site that up to 95% fail and lose all their money. Is it just in your blood to be successful at this? Are people not using stops effectively? Is it because people are not sticking to their strategies? For some people on here that have psoted their sob stories (NY HOOD), it is obvious why they failed. I appreciate all of your feedback on this. As mentioned in another post, I have about a year and a half before I start day trading and will have at least $60k to start with. So I am trying to be proactive to prepare myself. Thanks!
They come to internet marketing sites, where snake oil operators sell them suicidal systems and training , and brainwash them into losers.
It takes 4 years or more to become a doctor or lawyer. Thinking you are going to be a trader in a few weeks is silly. Its not what people want to hear, but blowing out a few accounts is part of the learning process, think of it as your tuition. However, as been mentioned before hand, here are some steps to help. 1) When starting out, keep an Excel chart of all of trades. It should include reason for trade, if it worked or not, what you learned from it. When you look back, you should notice a pattern on why certain trades are not working or working. 2) Create a Word document of your setup rules for a successful trade, including an attached chart for your review. 3) Have a money management plan.
I would say most new traders, if they do fail, probably fail for a variety of reasons. There is not enough information contain in the anecdotes offered as advice and wisdom on the internet to actually be worthwhile. What I mean is, simple catcheisms about how to be successful are probably true and false. There is a combination, some unique combination, where taking profits fast might work and a combination where holding onto losers work and a combination where holding onto winners works. Back to the question, I would say most new traders fail because of the following: Lack of capital and unrealistic expectations These go hand-in-hand. Many of the true professional traders are seeking returns of 25% to 30% per year. With limited capital, even good returns don't seem to be worthwhile. So, expectations are raised. Unrealistic are fostered by snake oil salesmen, as well. Lack of skill and lack of identifying talent It takes time to develop skill and to identify talent. Most traders are not willing to really become a student of the market. Lack of ability to accept uncertainty This is also a factor in the lack of the ability to develop skill and talent. Accepting and fostering decision making under uncertainty is very crucial. Why should someone who lacks talent and skill feel confident in risking money on an uncertain outcome? Most fail because of the above. Obviously, always some good traders end having a huge loser and bombing out. Markets change, as well. A lot of it goes back to needing capital. And a lot is a failure to develop a mental framework for success. And, I'm not talking about a trading plan but psychological, rational framework or mythology that will guide success --which is I feel the most crucial. A healthy framework provides for both objectivity and an appreciation for reality, as well as caters to the individual trader. The psycho-rational framework is really critical.
I think its a good thing that there's a ton of negativity. It kills the "get-rich-quick" mentality that some might have when entering into trading. If anything it'll make us newbies more careful when placing trades. There can only be two reasons why a trader fails: 1. Your trading plan was faulty to begin with. It was never meant to be profitable from the beginning. 2. Your money management plan was horrible. You risked too much per trade and by simple statistics, it knocked you out of the game.
Thank you for your responses. I don't want to start out with limited knowledge and expect huge returns. I have a plan in place. My wife works and makes a good income. When I leave my job, she will take on the benefits (medical, dental, etc..) I had and I will not need to generate much income to keep us afloat. Our expenses will be reduced drastically and I am planning to set myself up in a good position. I will not need to stress out about making X amount of dollars each month to cover bills. So that is a good thing! Another question I have is about strategies. I have been doing some sim trading recently and noticed that I have made quite a bit of money trading the "hot" stocks that have huge volume increases for whatever reason (unexpected earnings report, etc..) I buy them while they are on the upswing and then sell them a couple hours later for a profit. Is this crazy to try this strategy out? Am I just getting lucky? I plan on learning everything I can in regards to charts, candlesticks, etc..., but it's hard to ignore what I am doing in sim trading. I have read stories about many people who have strategies in place and know charts up and down. They still seem to lose money. So what I take away from that is that there is no rhyme or reason to make money in the market? You can read charts all day until you are blue in the face, but it is essentially a matter of luck? Once again, you are all so awesome for giving me advice. I appreciate everything and know that I will somehow pay you back someday.....
It's not just new traders -- many very experienced, previously profitable traders also fail. To see this for a particular subgroup of failed traders (in this case, floor traders who can't/won't adapt to electronic trading), look for the movie Floored, which was recommended on this forum: http://flooredthemovie.com/community/ I'd say the main reason traders fail is lack of an edge, or positive expected return. Markets are extremely competitive pricing engines, and are only getting more so over time, particularly in the era of computers and electronic markets open to all. The only way to survive in markets with almost perfect competition is to continually improve. My guess is that much of the time when people talk about lacking discipline or "failing to follow their strategy", they really never had any edge at all, having earned a brief, tantalizing profit that in the long run turns out to be a curse in terms of wasted time and funds.
I think a lot of new skilled day traders spot patterns in the current market and can make money in the short term, but then they get overconfident from their winners, and when the market conditions change, their strategies start backfiring in dramatic fashion. For anyone wanting to begin day trading stocks I think the best thing to do would be simply to watch the market tick-by-tick for 2+ years and wait until you've seen a whole range of different market conditions before committing a lot of actual money to trading. Focus primarily on watching the market and learning how stocks move on different kinds of days, and focus less on making money. During this time stick to just paper trading or trading small size. College or graduate school is a great time to do this since you have several years of having a lot of free time. Once you have developed multiple strategies for different market conditions and learn the signs for what type of market conditions are likely to occur that day, stuff becomes highly-predictable and it then just comes down to good risk management and execution. Once you've been consistently having something like 80% to 90% winning days over the long-term, then that's the time to start focusing on the making money aspect more. Until then your focus should be more just on the learning aspect. If your primary goal initially is to make money instead of learning about how stocks move then it can be pretty easy to start thinking that winning trades are good trades and losing trades are bad trades. That's where new traders tend to run into trouble.
2 years. tick by tick... watch... wait... I'd take Chinese water torture over that. Or bamboo under the fingernails.