I always try to tell people what they need to do in order to have a legitimate shot at become a successful trader, but it dawned on me that I rarely point out the equally important factors that cause as many as 90% of all new traders to fail. By fail we mean lose money since that is what this game is really all about, success equates to making money while failure is associated with losing money. Of course there are different degrees of success and failure, and then what do we consider breaking even? But, for now lets just concentrate on common flaws or mistakes that are the recipe for a failed career as a trader.
Now, although we keep score in trading by keeping track of your P&L, this does not necessarily mean the P&L at the end of the day. I have seen many traders have an incredible day or two only to end up at the end of the week or month in the red. Being a successful trader is achieved over a longer period of time as very few if any traders win everyday. At the end of the year are you going to have gains or losses. It’s really as simple as two colors, red or black. Here some reasons for constantly ending up in the red.
Many of today’s new trader’s hear stories of the ‘old timer’s’ in the late 90’s who watched their screens turn green for pretty much anything they bought, and to some extent it was the heyday of day trading. Well, get over it, those days are long gone and you now need to have a process for becoming a successful trader. Not having a sound approach or series of techniques will cause you to rely on guesswork and new day traders have not yet developed anything that can be called instincts, and sometimes for a day or two you may feel like you have an instinct for the way a stock will move, but this will undoubtedly work against you over time. The way in which you identify opportunities and trends in the market will be the main ingredient in determining your future as a day trader. Consistency in picking up those buy and sell signals that fall within your approach to trading is the all important factor.
Consistency is based on sound fundamentals and discipline. I have seen so many traders try to reinvent their approach on the fly and this very seldom works, especially with newer traders. If you are using 3-minute charts or 5-minute charts or any charts for that matter you must use the same approach to identifying entrance and exit points. Of course there will always be certain circumstances that dictate you make changes to your approach, but these usually take the form of a major event or news item. But if you have the obedience to stick with your methodology your chances of success will be substantially higher.
Just because you had enough money to open a day trading account does not mean you as of yet have the ability to turn that money into profits. In fact most new traders are usually down before they are profitable. Don’t think that you are going to take the day trading world by storm, just build a solid foundation and learn to trade before declaring yourself the next great trader. Learn your craft and do not be afraid to ask questions of those who are getting the results you want. Most of those guys were at one time in your shoes and are usually happy to help. Be realistic and hone your craft in order to be in it for the long term. Too many new traders swing for the fences when a career is built on lots of singles and doubles.
Another reason for new trader failure is they too often try to force trades that clearly are not there. “Taking a shot” might be okay for seasoned trader who has already banked substantial profits and finds its sometimes fun to take that shot. But that isn’t you, at least not yet, so you must wait for that trade that fits into your basic approach and don’t force trades just trade. Sometimes the best trade is not to make one. The markets have thousands of stocks to trade and eventually a few of them will catch your eye.
It also may be a good idea to visit the articles on this blog about risk and money management as everyone has losing trades and losing days but the key to staying in the game is minimize your losses and maximize your gains in order to stay in the game long enough to really understand your craft. Learning why people fail is one of the most important factors in learning how succeed!