If you aren’t making money trading yet, the good news is that we can easily diagnose what you’re doing wrong. The reasons traders don’t make money are fairly predictable and common. Once you have figured out why you are failing to make money in the market, then you can move on to the all-important task of correcting what you’re doing wrong so that you can hopefully start profiting.
Don’t get discouraged if you’re at a bad place in your trading right now. No one gets rich quick as a trader, despite how others may portray trading on the internet. It takes time, effort and an ability to make mistakes, correct them and move on, in order to make money trading. Hopefully, as you improve and move on you will get better and better at trading and eventually start profiting consistently.
Here are 10 of the most likely reasons you may not be making money yet as a trader and some tips on how you can overcome them…
1) You’re over-trading
I have listed over-trading first because in my opinion it is the most common mistake made amongst traders and is the biggest reason they fail.
I have found that most people don’t even realize they are over-trading, so this problem can be difficult to diagnose at first. Over-trading can be caused by a number of different catalysts, but typically it comes about either from not knowing what your trading edge / strategy really is, not being disciplined enough to follow it, or becoming over-confident. Let’s break down each one of these problems so you can figure out which are afflicting you…
- If you don’t know for sure what you’re looking for in the market, meaning you haven’t really learned a solid trading method, you are essentially going to be gambling with no real edge in the market. This causes over-trading because most people trading without a strategy are going to ‘manifest’ trade signals that aren’t actually high-probability events. Essentially, we (humans) have innate tendency to see ‘patterns’ or meaning that isn’t actually meaningful at all. Bottom line, you need to actually learn how to trade, and of course, I recommend you learn my price action method.
- If you aren’t disciplined enough to follow your strategy and only trade when a trade signal is present that is in-line with that strategy, you’re going to fall victim to over-trading. So, you can see, it’s not enough to have learned a strategy, you also have to really master a trading strategy and have the discipline to stick to it like glue.
- Finally, for those traders who do have a strategy and do follow it for a while with discipline, the last big hurdle to jump over is over-confidence. Over-confidence typically creeps in very quietly, like a thief in the night, ‘stealing’ your trading profits by influencing your behavior in the market. You have to be EXTREMELY VIGILENT to make sure you aren’t jumping back in the market too soon (over-trading) simply because you have become de-sensitized to the risk in the market as a result of the positive feelings induced by a winning trade or series of winners.
2) You are not managing risk properly
This one is pretty obvious but it’s important to discuss because so many traders don’t manage risk properly. Not managing risk on every trade you take is a sure-fire way to lose money in the market.
If you need more ‘proof’ other than my opinions on this matter, check out a recent article I wrote called 28 motivational trading quotes, in that article you will find many quotes from other professional traders on the importance of risk management in trading.
To put it simply, if you don’t know your personal risk tolerance per trade, which is the amount you are personally OK with potentially losing per trade, you are never going to make money. Furthermore, even if you DO know that amount but you don’t stick to it on EVERY trade you take, you aren’t going to make money trading either.
3) You aren’t preserving trading capital for good trades
How often do you currently think about capital preservation? Do you even know everything capital preservation entails? If your answer to these questions isn’t “Often” and “Yes”, you have a serious problem on your hands.
When I talk about capital preservation, I am basically talking about patience. Having the patience to ‘sit’ on your trading money until a very obvious price action setup forms is essentially what I mean by capital preservation.
Think about the sniper metaphor for a minute. If a sniper in the military went about shooting all his ammo aimlessly, he would not be in a position to take advantage of an ideal situation where the enemy is in his crosshairs perfectly. He would be out of position likely and probably out of ammo. This is a good metaphor for trading because as a trader if you are trading all the time and wasting your ‘ammo’ / trading capital, you will not be in the right trading mindset to properly take advantage of good trade setups when they form NOR will you have enough trading capital to reap a big reward from them.
If you aren’t preserving your trading capital, you aren’t going to make money as a trader.
4) You trade the news
If you’ve been following my blog for any length of time you probably already know my views on news trading and why I don’t trade the news. But, let me explain briefly how I think trading the news causes traders to lose money.
Let’s look at an example to make this easier…
You are considering taking a perfectly good pin bar trade on the daily chart time frame that is in-line with the daily chart trend. The only thing giving you any hesitation is that a big economic news release that is scheduled to come out tomorrow. You sit there, stewing about, trying to decide if you should take the trade or not, over-thinking, over-analyzing because you’re reading everything you can about the expected impact of this news event. After much deliberation (and wasted time and mental energy) you decide to sit this trade out because everything you read says the market may move the opposite direction from the direction implied by the price action and technical analysis you’ve done.
Tomorrow comes, the trade is already working out as you expected before the news event is released. Then, the news comes out, BAM, the market is off to the races, screaming 150 pips in the direction you were going to trade, completely opposite to what everything you read said. You feel like someone just punched you in the gut, you feel angry, stupid and frustrated that you didn’t take that trade because you listened to all those outside opinions.
This is just one example of how news trading and fundamental analysis negatively affects trading performance. I have learned through my experience to avoid news like the plague.
5) You read too many websites and opinions
As I mentioned in the last point, reading too many opinions from other people or websites, etc., can be very detrimental to your trading. Trust me when I say the most frustrating feeling is losing money on a trade because you decided to listen to someone else rather than yourself. Never ignore your gut feel in trading because gut feel comes from trading experience and education.
6) You’re trading with too small of an account
I find that most beginning traders start trading live with too little money. It’s extremely hard to even have a chance at profiting if you are trading with a very small trading account. Anything under $500 is really pointless in my opinion because you will have to risk so little per trade that you won’t really be properly vested in your trading and even if you do hit a winner you won’t make that much to positively reinforce good trading habits.
You don’t want to be that guy who funds his account with $100 every time he blows it out. Be patient, save your money until you have at least $500 to $1,000 or more to fund your account with. In the meantime, learn how to trade properly and demo trade.
7) You aren’t placing stop losses properly
A big, big reason why so many traders lose money is because they don’t understand proper stop loss placement. They are placing stops based on greed rather than on what’s best for the trade. Read that last sentence again.
If you don’t know the difference between a stop placed from greed and one placed from logic and the best thing for the trade, then listen up…
If you say to yourself, “I want to trade 5 lots because that will allow me to make $5,000 on this trade, so I need to use a 50 pips stop loss”, you are placing your stop based on GREED and you probably will lose $2,500 rather than making $5,000.
Placing your stop loss based on logic so that you give the trade the best chance to work out, goes something like this: “I will place my stop loss below this nearby key support level even though its slightly beyond the low of the pin bar I am trading, because that will give the trade the best chance of working out in my favor without prematurely stopping me out”. Now, this line of thinking might mean you have to reduce your position size from 5 lots to 2 or 3, but you have to decide what’s better, making some money although perhaps less than you want and WINNING or losing as you would in the first scenario?
Let’s not forget, placing your stop properly as in the second scenario above, will work to reinforce proper trading habits through positive reinforcement. This builds long-term sustainable trading success.
8) You aren’t disciplined enough
This point is fairly self-explanatory and I did touch on it already. But, to stress its importance let’s cover it briefly.
Basically, how can you possibly expect to make money trading if you are an undisciplined trader who cannot follow a trading strategy or trading plan? You need to be disciplined in following your trading strategy and also in sticking to proper risk management as discussed above. If you don’t do both of those things, you will never make money trading.
9) You aren’t patient enough
I like to think of patience as the best way to understand what it means to be a disciplined trader. We are told from when we are kids we need patience and taught all the value being patient brings us. No doubt from an objective standpoint we all understand patience. Then why as adults trading the markets is it so hard for us to be patient?
Well, the answer is simple as you probably already know; we want to make money, fast. But, unfortunately, the market doesn’t give a crap what you or I want, it’s going to do what it wants regardless of your trades. So, we have to have the PATIENCE to only trade the market when it’s giving us the low hanging fruit trades that are ripe for the picking, and it takes a lot of patience to wait for them.
10) You don’t know what you’re doing
Finally, and perhaps most obviously, how can you expect to make money trading if you don’t have any clue or just aren’t sure of what you’re doing in the market? Do you know what your trading approach is for sure? Are you totally confident in it and in your ability to trade it and its effectiveness? If you aren’t sure of these things, you are never going to make money trading.
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- Warren Buffett
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