Greetings traders and welcome back to another In-Depth with Chris episode.
In today's discussion,
we will be talking about why most day traders are actually failing.
This is one of those touchy subjects where a lot of us
don't want to admit that the reality is,
the majority of traders are actually losing money.
That doesn't mean you have to, so we're going to cover
all of the different top reasons that cause day traders to
unfortunately fall below their expectations. That way,
you know exactly how to avoid those mistakes yourself.
You can see them coming from a mile away, and you can avoid
being below the curve. That's the idea.
Before we get going, please click that like and subscribe
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these videos for you guys. I appreciate a great deal, so thank you very much.
But let's dive on into that information and learn why most day traders fail.
The financial markets are a highly competitive niche.
It's a very zero-sum style of game, where in order for us
to win, we need to be better than others.
But really in life, that is mostly how all things work,
of some degree. In order to earn more,
we generally need to be better than those that are earning
less, in a lot of areas, in a lot of jobs. Trading is no different.
We need to be above the curve in order to earn income that
is above the curve. We're going to talk about all of the
different details that go into why day traders fail, but let's
start off with talking about what the success rate of day
trading is. It's entirely too common that we see day traders
brag about their successful trades, boasting about a large
winner they have, but meanwhile, they often end up sweeping
their losses right under the rug, and we never hear about
them. Therefore, it makes it seem to outsiders that day
traders are just generally rolling in the money, and it's a
very simple job, and there's not a whole lot else to it.
But the reality is, experts believe that somewhere around
10 to 30% of day traders are profitable.
That means that 70 to 90% of all of those attempting day
trades are actually not coming out in profit.
That's a very large number. Let that sink in for a moment.
Now, you don't need to let that number discourage you because
there are a lot of, well for lack of a better term, "dum-dums"
out there, but the reality is, that it is many day traders
that are succumbing to this inability to stick to their trading
plans after they go live, and that is what's leading to them
to fail with live money accounts.
To be successful, we need to work out an investment strategy,
and stick to our stop loss limits, and all that good stuff,
so we're going to cover all of this.
We're going to talk about all the different reasons
why day traders fail. In the world of day trading, it's all
too common that traders are out here, looking for a catch-all
solution to improve their day trading magically overnight,
and all of a sudden become a success and make millions of
dollars, and while that sounds wonderful, the reality of how
traders actually become profitable is by systematically
solving or addressing the individuals that are holding them
back, and that's exactly what we're going to cover.
We're going to talk about the top reasons
why day traders are being held back, the things that are causing
the most leaks in their game, so to speak, the things
that are hurting their equity the most. One of the biggest
mistakes that day traders make is not using a stop loss.
In theory, every new trader will have some kind of stop loss
strategy in mind, as a means of protecting their profits and
cutting their losses, but it's quite curious that so many
traders, after their beginning stages, switch away from using a stop loss.
The reason behind this is kind of simple.
It feels unnatural to sell a futures contract, or equity, when
it's going down, and allow ourselves to accept a loss. That is just human nature.
But the reality is, we need to become comfortable with accepting
that loss because by accepting that loss, we're allowing ourselves
to profit again on another day.
Let us imagine that our technical analysis told us that the
S&P 500 should be rising, and as such, we decided to take a long
on it. We decided to open up a few different contracts
in the futures market to take advantage of this expected movement
in the market. We open up our long position,
we've got our contracts rolling, and let's say that the market is moving in our favor.
It feels amazing to watch the market going our favor and
to watch our account balance grow.
Well, what if all of a sudden news came out and it sharply
changed the direction of the direction that we wanted? It started
going down instead of up, and not only did it start going
down, but it actually went below where we entered. Some traders
will find themselves getting rid of their stop loss because
they just are not ready to accept that their position
they were so close to closing out in profit, is now going to be a loser.
The truth is, if we can just accept it and remove our emotions from it,
we're going to be better off, and it'll allow us to make profits
again on another day. We're not trying to win every trade,
we're trying to win the majority of trades, which means we
need to accept when a trade is going against us with a stop
loss. Not managing risk well is another crucial downfall that traders exhibit.
This is somewhat similar to not using a stop loss, but it
encompasses the idea of maintaining healthy risk-reward ratios.
If we were to think about a scenario like we were trading
for a ratio of 2 to 1 in the market, meaning we wanted
to make 2x what we are willing to risk in order to achieve it.
If we were looking to achieve two points in the market
and our stop loss was one point below our entry, we're risking
one point in order to make two points. At this ratio,
if we always make sure that we're going for at least a 2 to 1 in this scenario,
we're always going to be profitable, even if we only have a 50% accuracy.
All of a sudden, the ability for us to maintain a profitable
trading composure has become a lot easier because the accuracy
requirement is now much lower, but if we were to inverse
that, if we were to go for one point with a two point stop loss,
our requirement for accuracy has now shot up drastically,
and we're basically going to have to win darn near every
trade, which makes it an awful lot more difficult and makes
the room for error all the smaller.
Not having a trading plan is another terrible mistake. Investing
in futures, equities, mutual funds, without a trading plan is
a lot like jumping in your car, turning onto the highway, and
just driving. Where are you going?
How will you know when you're getting there?
What are you hoping for?
If you don't have an exact trading plan, then it becomes
incredibly difficult to systematically improve whatever it
is that you're trying to improve because your variables are
constantly changing, and they're never measured. The trading
plan represents a way to have constants to allow us to systematically
control what we are doing. That way,
we can change one thing at a time, and we have something to
follow to take our emotions out of the equation. Oftentimes
in trading, our emotions are not our friends.
If we have a trading plan, usually we're doing tremendously
better off than someone who doesn't, and we can rely on our
trading plan to give us a degree of consistency as we trade going forward.
Overtrading is another common mistake that newer traders
will tend to make when they're feeling very gung-ho, or excited
about a particular trading process that they're trying to
employ. The problem with overtrading is, at the end of the
day, it doesn't really matter how many trades we make because
we're not measured as traders by the number of trades we
make, but instead, we're measured by the degree of profit that
we can generate. Which means, if we take two trades and we
end up with $100 in profit, or if we make 100 trades to reach that $100 in profit,
usually, it's much more preferable to make the two trades,
have less time investment, as well as less fees and commissions
that we might have to pay from making more trades to get to the same route.
The less trades we can make in order to get to that profit
is better, and if we remember that. and we allow ourself to
avoid an overtrading scenario, that will allow us to keep
our emotions in control, and once again, having emotions in
control is a huge aspect to being a successful trader.
The fear of missing out, otherwise known as FOMO, is arguably every trader's worst enemy.
This is something that applies to experienced traders, as well as new traders.
This is something that needs to be monitored and paid attention
to in your trading career at all stages.
The fear of missing out is something that is just tied to our human
psychology. It's the action of deciding to do something because we feel
like we already know what's happening, and we do not want
to miss out any further on something that is already happening that we feel
is validating what we already thought would happen.
This is the common history of when we are looking at the
market, and we go ahead and we buy because the market is rising,
because we expected it to rise, even though the reason we
are buying is not part of our trading plan. That is a classic
case of FOMO. While sometimes it might work in our favor,
it's not anything that can be measured or relied on because
it's not part of our trading plan, and as such, it is quite
usually a net negative, and can lead to some massively tragic results for traders,
and generally does. If you browse the internet and look up
FOMO, you'll find tons of traders reporting their incidents,
self-admittedly, where they succame to FOMO, and it did not end in their favor.
Going live with too much capital, but not enough results,
is a very common problem amongst new traders.
This is what happens when traders trade on a demo account,
and they string together, maybe three or four wins, and feel
like they've got the hang of it,
they know what they're doing, and surely they wouldn't have
won three or four trades in a row if they didn't know what
they were doing, so they're going to just dump their entire retirement fund
into their trading account because the more money they have,
the more money they'll make. While in theory, the more money
you have in your trading account can theoretically lead to making more money,
this is only true if we are winning the trades that we are making. In order
to be sure that we are going to have a solid, fighting chance in the markets,
we should experience what a hundred trades feels like on
a demo account before we even consider moving to a live account.
If we are seeing results that were satisfied with, with a
hundred trades, at that point it would then be logical to
begin maybe working our way over to the live account, but
even then, it would not be logical to dump all of our
hard-earned pennies into our trading account, because in the
beginning, when we switch from a demo to a live account, it
is a very different psychological feeling, even if we don't
think it will be, it just is. Many traders will trade quite
well on a demo account, but then all of a sudden when they
go live, they just fall under the psychological pressures,
and their accuracy rating just drops off a cliff, and when
they were profitable on the demo account, all of a sudden
they might not be profitable on the live. We always need to be prepared for
this. The more data we have supporting what we're doing, the
better off we are, so accumulate that trading data before you go live.
Another common mistake that traders make is not accumulating
enough data from multiple different market landscapes and
multiple different assets. At first, you might say, well if
I'm interested in trading the E-mini S&P 500, and my strategy
was formulated on the e-mini S&P 500,
well then, why would that be useful to me?
Well, the short answer is if we use different market landscapes,
it is possible that we find that our strategy that was formulated
on the E-mini S&P 500. might perhaps work better on say, crude
oil, who knows? We don't know until we try, but it also allows
us to see how our strategy performs in different market landscapes.
It lets us know if the market is going to favor our strategy
when it's ranging, or maybe it's going to favor our strategy
more when it's trending. These
are all different things that we want to expose ourselves to, that way
we're prepared and know how our strategy will react when
that time arrives in whatever asset we choose to ultimately
trade our strategy on. The more data we accumulate almost always is going to
work in our favor, especially when we allow ourselves to
view different market landscapes and trade different market
assets. In trading, it's always important to remember to be
humble. Which means, don't overlook simple steps like the
ones that we discussed today.
You may think that these are rather easy to understand and
you know that you'll do just fine
even if you kind of just keep them on the back of your head,
but if you even neglect just one of them, like the FOMO rule,
you don't take it seriously enough, that can lead to one mistake
that leads to a wiped account, and no one likes a wiped account. We've all done it.
We've all been there, and it's part of the learning process,
but only if it happens and doesn't continue to happen.
You never want to continuously repeat your mistakes. Instead,
we want to learn from our mistakes, and if possible, it's
always valuable to learn from other mistakes.
If we focus in on the different things that we talked
about today, and really make sure that we focus on back testing
and forward testing, which means we actually use that information
when we trade, with the post data live on a demo account,
so we're getting results from how it would have done in the
past, as well as how it would do in current market
activity, we can get a really good solid idea of what to expect
when we go live, and if we feel that we've done our homework,
then usually our psychology will allow us to be more relaxed
and feel more confident about what we're doing and less prone
to emotional swings. But until next time folks,
Thank you for joining me, as always.
It is always a pleasure to bring you guys some information,
please click that like and subscribe button down below so
I can keep coming out with videos for you, and I will see
you in the next one. Happy trading everybody, see you soon.