Why most traders fail

Discussion in 'Trading' started by LondonUSTrader, May 30, 2008.

  1. An interesting article on failure.

    Today's Featured Article
    Why Most Traders are Virtually
    Assured to Fail
    By Ryan Jones

    The purpose of any article is to educate. But educate to what end? The purpose of this article is to educate, but to an end that is actually meaningful to you. The title of this article is not just to give you information that makes you realize you are in a certain category or class of traders...but to give you the information so that if you are in this category, you can successfully extract yourself from it.

    Whenever the opportunity arises, I remind traders that the statistics support the assertion made by the title of this article. It is estimated that in any given year, 85%-95% of all individual traders are in the red. I have many logical theories about why this is the case, many of which I am going to list for you in this article. But more importantly, for each cause that can be attributed to the failure of so many traders, I will also provide a solution.

    I have been trading the markets since 1987 in one capacity or another. I have been involved in this industry full time since 1992. Over the years, I have talked with a lot of traders, analyzed countless strategies, and as a result, built a list of contributing factors to failed attempts at profitable trading. It was necessary for me to not simply build the list of contributing factors, but to also address each one if I had any chance of extracting myself from this category as well.

    I recently posted a video online of a student who began trading one of my strategies back in August of 2004. Since then, he has seen that strategy, coupled with my Fixed Ratio money management strategy, grow over 800% in 3.5 years. The only reason he has been able to be successful is because he addressed the list I am about to give you. After you finish this article, you can watch the video by going to the following link:


    Contributing Factors to Virtually Assure Failure:

    1. False Expectations

    People, by nature, see what they want to see and tend to subconsciously ignore things that may cause problems. It is almost like the ostrich that sticks his head into the sand when trouble comes. In trading, this is a recipe for disaster. For example, if I say I have a strategy that can potentially produce 1,000% in the next 3 - 5 years while risking 50%, there is equal discussion in that sentence with regard to profit potential and risk, but they see the profit potential being so big that the risk can't possibly be real. Anything that has a potential return of 1,000% must work to some degree no matter what, or so they subconsciously reason within their minds.

    How do I know this? I have had similar situations like this in the past and after 3 months (even though it was based on a 3 - 5 year potential), a trader was not making money and claimed that I had made promises of 1,000%, which could not possibly be true since after 3-months, the strategy was not making anything, but actually showed losses.

    There is a simple solution to this, at least simple to speak with words. The solution is to simply make a conscious effort to not trade anything without repeating to yourself, out loud, that there is the possibility that this venture will lose money. Say, out loud, how much you could lose. You will find that this will often cause you to look at the strategy a little closer and analyze whether the profit potential AND the probability of reaching the profit potential, is actually worth the very real risk.

    2. Lack of Commitment

    People get involved in trading for one reason...the opportunity to earn a greater return than putting the money in a CD or lower risk mutual fund. For some, that greater return actually means huge returns...perhaps big enough to allow them to quit their job and trade for a living.

    There is nothing wrong with the above. However, what happens is that traders' expectations are no longer reasonable as far as time is concerned. They reason that if they are going to reach their goals, it has to begin to happen immediately. I estimate that the average time a trader will remain committed to a strategy that is in a drawdown is 3-months. If they haven't produced profits within 3-months, they are on to the next best thing and the previous strategy was just a scam.

    Don't get caught into the trap that just because the trades themselves are short-term, the venture itself is not a long-term investment.

    The solution is simple. When you determine what you are going to trade, set the boundaries and commit for 3-5 years. The boundaries need to be based on time and performance. You also need to make sure these boundaries are inextricably related to the strategy being traded. One set of boundaries may be suited for one strategy, and not applicable to another strategy.

    For example, you have a strategy that has never shown a losing month in the last 5 years of testing. My time boundary for this strategy might be based on a minimum trading period of 6-months. If the drawdown expectation was 15%, I might create a boundary of 30% to account for the unexpected. So, if after 6-months, I haven't hit a 30% loss, I will analyze the performance. The only thing that would keep me from trading this for at least 6-months would be the 30% risk boundary being crossed. Otherwise, I am committed.

    On the other hand, if the strategy I am looking at has gone through several 6-month long drawdowns, then the absolute minimum I will commit to this is 2-years. And, as long as I do not hit my risk level boundary within that 2-year time period, I will continue trading.

    The student mentioned above who began trading back in August of 2004 was barely over breakeven after a full year of trading. Since his 5-year goal is a 2,000% return with this strategy, he was somewhat disappointed. However, he made the decision to stick with his trading plan (which was a 5-year trading plan), and because of his commitment, is now up over 800% with that strategy.

    Do not underestimate the power of commitment.
  2. 3. Overtrading

    Greed is a very subtle, but deadly contributing factor to failure. Greed is hard to detect, therefore you have to look at the symptoms it causes to determine whether it might be rearing up its ugly head in your trading. Risking more than you should is one very bright warning sign that greed is affecting your trading decisions. Overtrading is simply risking more than you should, or more than you are comfortable with, or more than allows you to keep your emotions out of the decision making process.

    Overtrading often contributes to the lack of commitment, and can also be a result of false expectations. Everything in this list is related to the other in some way. But overtrading is the one thing that can end a trading account faster than anything else I know of. In fact, I would say it is the number one contributing factor to failure because it renders the trader helpless to come back because it wipes out the account.

    The solution is to implement a solid money management strategy (I would suggest my Fixed Ratio money management strategy), and implement it so that it would be very difficult for the strategy to hit your risk level boundary.

    4. No Trading Plan, or Inadequate Trading Plan

    A solid trading plan should be detailed, and if it is detailed enough, it will actually address most of the things that contribute to all but certain failure. This industry is woefully lacking in properly educating traders in this area. Most everyone focuses on trading indicators and price analysis. I'm telling you right now, you do NOT NEED to focus on trading indicators and price analysis to be tremendously successful. If that is what 85%-95% of traders focus on, and 85%-95% of traders fail, HELLO.

    The strategy my student mentioned above used to grow his account by more than 800% does not focus on picking market direction. It focuses on mathematical probabilities. It is not a difficult strategy, and actually is one of the most logical I have ever developed. But many traders, despite the evidence of success, won't trade it because it does not have the "sex appeal" of accurately predicting where a market is going to go.

    Get past that, and the sooner, the better. Focus on having a trading plan that is long-term and detailed. Address the other contributing factors within that trading plan and you are well on your way to outperforming 85% to 95% of all other traders.

    The Solutions:

    I realize that talking about the solutions to these contributing factors is different than implementing them, especially when it comes to creating a trading plan. Almost no one in the industry even addresses what goes into the proper development of a trading plan.

    This is why I put together a package that literally provides everything a trader needs to become successful. It provides everything my student used to create a return of over 800% in 3.5 years...except the commitment. Only you can provide the commitment, I am simply making it easier for you to make the necessary commitment.

    The first step to taking yourself out of the category of virtually assured failure (if you are doing what most other traders are doing), has already been taken, you read this article. The next step is for you to go to the following link and take a look at a few online videos I have created, detailing the student (Dr. T) who traded according to the trading plan and has reaped huge rewards from it. You will also see some pretty incredible track records, statistics and analysis that you probably won't find anywhere else in the industry. The videos are COMPLIMENTARY, so there is no reason to not take a few minutes to see if they can help in any way.


    In closing, I have created actual trading plans that you can either use as is in your own trading, or use as templates to create your own. These trading plans are very similar to the exact trading plan Dr. T used. The reason I have created these trading plans is because it took me years to put together all of the details that are necessary within a properly developed trading plan. This will save you a great deal of time, frustration and money.

    Until next time, best to all of you and your trading ventures.

    Ryan Jones

  3. Apologies in advance for some of the blatant advertising in the article, but I thought some of the general points were worthwhile considering so I posted the article in full.
  4. speres


    If you gave 100 people a few million pounds I wonder how many would have anything left after 5 or so years. I'd guess less than 3%

    good post btw
  5. Why Most Traders on ET are Virtually Assured to Fail?

    Because they do Not learn or understand JH methods!
  6. Where is the point about small stops? :)
  7. I would guess a) lack of backtesting (or practice with a small account) to learn how their system works in varying markets and trends and conditions and b) adequate assessment of vulnerabilities to their system. You have to know when to hold your cards and most people in trading, I would guess, are very balls-to-the-wall, nothing's-gonna-stop-me kind of people...

    Well, there are things that can stop them if they would just take the time to analyze them...
  8. To put things in perspective, how many camera enthusiasts can make a living selling photographs? The gulf between amateur and professional photographer is huge.
  9. I imagine that most people fail at trading because they simply have no idea what they are doing or indeed who they really are.

    This in no way implies criticism, it is just that there is no entry criteria into the world of trading.

    The pass rate for commercial pilots is quite high I imagine because the entry criteria is adjusted to suit and I imagine this applies to all professions.

    Entering into trading is the same as starting a business, with the huge exception that most people starting a business have either a good knowledge of their product or a good knowledge of small business practice.

    New Traders not only begin with neither, but they bring with them a set of expectations that are both dead wrong and entirely unrealistic. These expectations must be stripped from them in order for them to proceed.

    Very few people have what it takes to push through this stage and so they proceed to certain failure.

  10. ..........also they hve no one to learn from, most of the books are utterly useless rubbish written by non traders.
    #10     May 30, 2008