We’ve all heard that 80 to 90% of traders don’t make money, which is a very common statement. So, you basically have two choices: give up your dream of being free from work, jobs, and the drudgery of modern 9-to-5 society, or try to figure out why most people fail at trading and work to make sure you are in the top 10 to 20% of traders who actually make money.
You need to look at yourself closely and decide what you want. Do you want to submit to the modern “slavery” of bosses and jobs, or do you want to really give it a try and commit to learning how to trade and becoming consistent at what is really the only job that can give you true freedom?
The first step is to figure out why most people don’t make money trading and learn what to do about it.
Problem #1: Not trading in demo mode first
Why is it a problem to not demo trade first? Well, for one thing, you should figure out how the trading platform you’re using works before you try to use it to make trades. You wouldn’t want to lose money because you didn’t fully understand how the trading platform works.
Next, you will lose money if you trade live before you know how to trade with your method. Before putting real money on the line in the markets, you need to get some “runs on the board” and show that you can be consistent.
I don’t think you should spend too much time demo trading. However, after you’ve learned a trading strategy, 1 to 3 months is a good amount of time. But you should definitely try out your trading method with fake money before you trade with real money. This will keep you from needlessly losing money.
Of course, trading for real money will be the best way to learn because of the emotions involved, but that doesn’t mean you should jump right in without any practice.
Solution: Get a practice trading account.
Here is where you can get the demo account I recommend. I suggest you open it up and practice making trades on it while you study my trading strategies.
Even though it’s not real money, treat the demo account as if it were. The easier it will be to switch to a real account when you’re ready, the more like a real account you treat the demo account. Find out here how live trading is different from trading on a computer.
Problem #2: Making it too hard to understand
Many traders don’t make money because they make the trading process too hard. People tend to make trading more complicated than it needs to be, from the strategy they use to how often they check the charts to how they manage their money. It’s easy to make trading more complicated than it needs to be.
Maybe traders make their charts too hard to understand first. Beginner traders often think that the more they learn about and use indicators, the better off they will be. But, as I explain in my article about why indicators will ruin your trading account, this is completely false.
If your charts are cluttered and look more like abstract modern art than a price chart, you may be making the analysis process too hard. If you can’t stop looking at the charts with shorter time frames, you’re probably making things more complicated than they need to be. If you sit there and look at your charts for hours or read about the economy all the time, you’re also making it too hard.
Solution: Make it easier
Remember that price is the most important piece of information we are all trying to figure out and trade. So, the first step to not making trading too hard is to not hide the price action, which is the most important thing in any market. Before you do anything else, you need to get rid of the indicators and learn how to trade on a naked price chart.
Also, keep in mind that adding more variables, like indicators, news or fundamentals, other people’s opinions, or anything else, will only make your mind and trading process more complicated. Remember, keep it simple stupid.
Problem #3: Not knowing and being okay with the fact that losing is part of the game.
Accepting that losses are part of trading is one of the hardest things for new traders to do, and it’s often what makes them lose all their money and give up. You need to know this and accept it. You also need to plan for how you will deal with losses. Traders often try to avoid losses by not using stop losses or hedging, but this only makes their losses bigger and their accounts go bankrupt faster. You will always lose trades.
When traders lose, they tend to stop trading. They think of losses as very bad, and a trader’s emotional response to a loss can be very strong. A trader may be afraid to take the next trade and “hide” for a while, or they may trade too little on the next trade, only to see it win (but a much smaller winner than otherwise possible). Traders also tend to feel like getting even after a loss. They do this by jumping back into the market to try to make up the money they just lost, which usually only leads to more losses, making the cycle of bad trading habits even stronger.
Solution: Plan for, understand, and accept losses
The best way to deal with losses is to understand them, accept that they will happen, and make a plan for how to handle them.
Even if your edge is, say, 80% profitable, you need to know that any one trade can go wrong. Even if you win 80% of the time, that doesn’t mean you know when the other 20% will show up. So, if you make 100 trades, you might lose 10 in a row. Can you handle that? Consider how you would prepare for that. Check out my article on how wins and losses are spread out randomly to learn more about this idea.
Next, you need to know the difference between a good loss and a bad loss. Now, you might be wondering, “What in the world is a good loss?” A good loss is one that happened because you were patient and disciplined with your edge. You made a trade that fit with your trading strategy and plan, but it didn’t work out because it was a natural statistical loser. No harm, no foul.
A bad loss is one you could have stayed away from. Most of the time, this means that you traded too much or when your edge wasn’t there. I think that bad losses like these are the main reason why most traders fail. Most traders just trade too often, which is basically the same as gambling. We all know that when you gamble, the house always wins. In this case, the house is other traders who are trading against you. So, if you want to lose money, you should trade often. You must do everything you can to avoid these bad things.
Problem #4: Focusing on money instead of trading
Most people are so focused on money, profits, and rewards that they lose sight of what it takes to get them.
Do you think a professional golfer or basketball player is thinking about money and making money during a game or tournament? No! I can tell you for sure that they are not. They are only thinking about the game they love and how to do their best at it. To win a tournament, a golfer has to play each shot and each hole over several rounds. He is not thinking about money. He is thinking about how the game works, what he does, how he thinks, etc.
In the same way, you won’t last long in the markets if you think too much about money and not enough about how trading works.
Solution: Don’t worry about where you’re going, just enjoy the trip.
The solution is to realize that you can’t always think about making money when you trade if you want to make money. The goal is, of course, to make money, but the journey is trading, and if you don’t do it right, you’ll never make money. Almost every day, new traders send me emails asking how much they can make per month, how much they should risk, etc. These are not the right things to ask. They should be asking questions like “How do I trade well?” and “How do I learn to read the charts?
Most people don’t want to focus on the mechanics and process of trading because they think it’s all about speculation and making money. However, if you don’t pay attention to the mechanics and process, you’ll never make it. You have to be interested in trading, playing the game, and winning, not just in making money.
Problem #5: Not first learning how to read the daily chart.
Most new traders want to give day trading a try. They have an idea of what day trading is, and it seems like they all want to look at short-term charts before focusing on the daily chart. Who could be mad at them? With all the false information on other websites and forums, it’s easy to get hooked on watching the 1 and 5-minute charts move from tick to tick. But you need to figure out quickly that these time frames are just noise.
The real story of the market can only be seen when you zoom out and look at longer time frames. Daily price bars show information from the whole day, so they are more important.
Solution: At first, only look at and trade on the daily chart.
If you don’t learn to trade on the daily chart first, the solution is to only look at the daily chart time frame. I’ve written a lot about why you should trade on longer time frames, so I won’t go over all of them here. But suffice it to say that you will never make money on any time frame shorter than the daily if you don’t understand the key levels and how to find and trade trends on the daily chart.
If you want to trade intra-day charts, you need to know what’s going on with the daily chart in terms of trends, levels, and price action. The solution is to realize how important it is to learn the daily chart and then focus on it until you’ve got it down.
Problem #6: Poor money management
Poor money management is a big problem that puts many traders (most, actually) out of business before they even get started. Both a lack of education about how important it is to manage money well and greed are at the heart of this problem. Many people don’t want to believe that they can’t risk a lot of money on each trade, so they turn up the risk right away and quickly lose all their money.
People make the biggest money management mistakes when they trade with money they can’t afford to lose and when they risk too much on each trade. This is also true if you don’t know how much you can lose mentally and financially per trade and still be fine.
Solution: Plan and know what to do.
So, how do you fix not being good with money? Well, the first step is to realize that you can’t gamble with money you can’t afford to lose. If you don’t have extra cash to trade with and are trying to fund your account with a credit card, you’re doomed. If you put more money into your bank account than you know you should, you’re in trouble.
When you first start, you have to figure out if you have any money to trade with. Trading and speculation are risky, and you have to go into it with the idea that you could lose the money you’re trading with. I’m not saying you WILL lose it all, because if you train and are disciplined, you won’t. What I am saying is that you need to be mentally ready to lose it all. When we go into trading with the attitude that it’s okay to lose, we put ourselves in the best position to win, no matter how strange that may sound.
Money management means putting money into your account that you don’t really need and not risking more than you can afford to lose on each trade. I tell people that they should set their 1R per trade risk to a level where they could still trade that amount even if they lost 20 trades in a row. Click here to learn more.
Problem #7: Too many trades
Over-trading, or trading too much, is probably the biggest reason why traders lose money. Almost every trade has made too much money at some point. People who stick around long enough to find some success are the ones who figure out what they are doing before it kills their account. Most people either don’t figure it out or can’t stop doing it.
I’m talking about trading when your strategy or edge is not there. It’s a mistake caused by greed and a lack of patience. I know you want to make money on the markets very much, but trading more often is not the way to do it. One of the main reasons traders trade too much is that they look at shorter time frames. Another problem is that they use apps on their phones to trade. All of these things make people get hooked on charts, which leads to overtrading. Over-trading is like gambling, and as I’ve already said, the house always wins (meaning, the casino, or the broker or other traders, not you).
Solution: Slow down, slow down, slow down…
If you trade too much, you need to slow down in every way you trade. This means that for a while you should only look at the daily chart, not trade on your phone, and only look at the charts a couple of times a day for 20 to 30 minutes each time. You need to think like a sniper when you trade, not like a machine gunner. In trading, you must know, accept, and act on the fact that less is more.
Problem #8: Not knowing how the market works or how to read how prices move.
Obviously, you won’t make money as a trader if you don’t know how markets usually move and the basics of price dynamics and price action. Yet, I keep getting emails from traders who clearly don’t understand the basics of how the market works and how prices move.
Here are a few examples of this problem:
- Traders who are always trying to trade breakouts. They don’t understand false breaks, so they often lose because of this.
- Not knowing how pullbacks work and trying to pick tops and bottoms or getting into the market when it’s already gone too far.
- Not being able to figure out how to read the chart. Instead of focusing on just one price bar, you should look at the whole row of bars, from left to right, and what they are telling you.
Solution: Don’t just react; learn and plan.
Price action in a market shows us important things, like key levels and previous price action signals, event areas, and other things we should have marked ahead of time. Mark these things on your charts in advance, because these levels and pieces of information will help us make trades in the future.
Problem #9: You don’t have a daily mantra or routine.
If you don’t have a plan, your trading will be random and out of your hands. The way you act will show up in how well you do in trading. You can’t expect to have consistent trading results if you don’t have any kind of consistency in how you trade.
The problem is that many people don’t start out by learning from a mentor or someone with more experience. Instead, they think that they can just “wing it” or “figure it out” on their own. But what ends up happening is that they don’t have a real trading strategy that they have mastered. Instead, they just look at the markets at random and hope that somehow they will make money.
Solution: Figure out how to make routines and stick to them.
I’ve written a lot about what I do every day and how I approach the markets. My daily routine is a mix of life, strategy, and the mind. I don’t look at charts all day long. I know what my strategy is, and I usually look at the charts in peace and quiet two or three times a day.
Problem #10: Trading without training from a professional
Trading without professional training, not getting real trading knowledge, and not mastering skills before going into the battle of trading is a killer for any trader and their account.
I don’t understand how or why anyone thinks they can be successful at trading before they have at least learned a good strategy based on price action. Before anyone can even hope to make money trading, I think they need to get professional training and learn how to read real charts. Financial market speculation is not for people with weak minds. Before you put your hard-earned money at risk in the market, you really need a guide and a good education.
People don’t think they can be successful without professional training in any other serious job on Earth. Professional athletes, doctors, lawyers, and everyone else all need training from a professional.
Solution: Get help from a pro.
As I said above, the best way to learn any skill is to learn from a professional. You should give yourself the best chance of success on the market, which means learning how to trade from someone who has already made all the mistakes you will make and can teach you how to avoid them. If you do this, you will save money, time, and a lot of mental stress.
In today’s lesson, I wanted to show you how to deal with some of the most common reasons why traders lose money. Remember that when I first started trading, I took the same steps you are taking right now, and I ran into most of the same problems along the way. It’s not enough to know about the problem; you have to put each solution into practice consistently.
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“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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