Why 95% of Stock Traders Fail.
& what you can do to avoid being one of them.
Good morning investors,
I feel like if you have ever invested in the stock market, then the thought of trading has come into your mind. If not, that’s great, and you should probably stick to what you are doing.
However, for anyone else who has traded stocks, you probably know how hard it actually is.
If you are on the other side of this screen telling me it isn’t that hard, just wait. The market will get you back. But today, we are going to talk about the five primary reasons (in my opinion) why 95% of stock traders fail.
1. Lack of Discipline
This is probably one of the biggest of the five reasons why most stock traders fail, and that is because it ties into a lot of the other reasons we are going to talk about today.
When you are not disciplined, there is no way you can keep your cool and stick to your trading strategy. For most people, as soon as money is on the line, they forget all about acting rationally. Money has a funny way of emotionally toying with us.
Generally, when you lack discipline, it leads to losses, which leads to you taking riskier positions to try and recoup your losses. Unfortunately, that is quite a famous rabbit hole many traders find themselves in.
The worst part: it’s hard to know it’s happening until the vicious cycle is over.
2. Ignoring Risk Management
Peter Lynch (legendary investor and active manager of the Magellan fund) of Fidelity Investments has said:
In this business, if your good, you’re right six out of ten times. You’re never going to be right nine times out of ten.
Let’s face it; you are going to lose money. It’s just something that happens when trading and investing in the stock market.
What doesn’t have to happen is losing all your money on one trade because you just needed to flip this trade 5x.
Proper risk management is of the utmost importance when trading stocks. You should know at all times how much you are willing to lose in each trade and then have the discipline to exit and not get stuck holding a worthless bag.
It is the only real defense for defending major losses, but most people throw risk management out the window when they see somebody online make a 1,000% trade.
Fear of missing out kicks in, and you suddenly find yourself holding 90% of your portfolio in one position.
Don’t be that person.
3. Lack of Knowledge
This section is actually kind of a double-edged sword.
You see, when traders first start in the market, they actually tend to do well. This is because their lack of knowledge and experience has not yet taken a toll on their self-confidence and trading strategy.
However, the longer you stay in the market, the more you come to know and learn. When you then try to apply what you’ve learned to trading, more often than not, it leads to you overthinking and being emotional because you now have a better understanding of the risks.
(At least that’s the way it is for inexperienced traders)
Experienced and successful traders know exactly what stock they are trading, what sector it’s in, and what stocks run on sympathy. Basically, everything there is to know applies to their trading strategy.
4. Phycology
Despite what you might think, in this world of numbers, data, statistics, averages, prices, etc., 90% of trading is a mental game.
Unlike sports or many other professions, no one competes against you in the stock market. ( unless you count hedge funds and market makers.)
It’s simply you vs. yourself.
You are the one who determines what to buy and sell and when. When they are starting out, many traders like to blame well everything but themselves. But actual progress is only made when you are accountable and responsible for every choice.
The best traders know what triggers them, gets them in a bad headspace, and makes them stick around too long in a trade they know they shouldn’t be in. However, beginners often don’t realize how much an effect seeing your profit and losses has on your mental state.
Waking up in the red more often than not will only lead to you making bad choices like trying to recoup your losses.
5. Not Sticking to the Plan
When trading stocks, or any securities for that matter, you should always have a plan. Not only that, but you must stick to your plan.
Before entering any position, you have to know at what point you are getting out and when, and you have to be prepared for the worst-case scenario.
All of that seems easy enough, right?
Wrong.
Even if you made a plan, something changes when you enter that position with your hard-earned money. You become emotional.
That is why, before you enter, it is so important to have your plan already mapped out. If you enter a trade first and then try to make a plan, it will be impossible to keep. You won’t be rational and unemotional while deciding when to sell, no matter how hard you try.
Many traders suffer from this problem of not sticking to the plan, which has a lot to do with self-discipline.
As you might have noticed, a lot of these reasons are either similar or compliment each other. That’s because trading is so much of a mental game with many facets making it so challenging.
If you wish to be one of 5% that do make it in the trading world, re-read this article and take notes. You will want to make sure you have your behind covered from all angles before you take that trade. That way, at least you will know where you went wrong, and you will be able to learn from it.
There is no point in making money in a trade when you don’t know why your strategy worked. There’s no repeatability with that.
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Have a great day, and remember to live in the moment.
