It is widely known that traders fail, in fact, most traders fail, but what does it mean to fail? In this article, we dive into “why do traders fail” a little deeper.
What Makes Most Traders Fail
The thing that makes most traders fail is a lack of real experience, knowledge and money or risk management. Understanding the markets is one aspect of it all, but it is another thing to manage the trades in a way that doesn’t decline the value of a portfolio over time.
Why 90% of Traders Fail
It is said that 90% of traders fail. There are statistics shown on some websites displaying the % of traders that lose money with them. Generally the statistic lies around 60% – 85% with many brokers.
The statement that 90% of traders fail could come from the fact that traders aren’t all failing all the time, meaning that this broker stat is just showing the losing accounts at that time.
Traders may be in profit for a period of time, then miraculously blow their profits quite quickly, so while the broker stats are better than the overall, generally accepted stat of 90% of traders failing, it could be that many traders are doing ok at the time, but periodically these new traders will drop off sharply at some point in their journey.
Why 99% of Traders Lose Money
Whether its 80 – 90 or 99% of traders failing, these odds don’t sound appealing. The fact that a huge amount of traders fail is partly due to a low barrier to entry. People are able to go in and ‘bet’ or try to trade without even knowing what financial instruments they are trading, what they represent or what value they are.
To set yourself into the top 1% – 30% of traders that turn a profit, let’s dive a little deeper into what it takes.
How to become the top 1 to 30% of traders
To break into the top traders that actually make money, it means you simply need to turn a profit.
To do that, it takes a consistent trading strategy that wins more often than it loses (strike rate), or that has a good risk reward that works out mathematically profitable with the strike rate.
It also takes a disciplined approach, with consistent risk management for the setup and to be able to repeat a process over and over again. This also includes watching the charts, the depth of market and order flow.
What It Takes to be a Good Trader?
Knowing a range of skills of trading will allow you to develop as a trader and navigate the live markets with more insight. So, what are these skills?
Order Flow: Understanding and being able to read the ‘ticker tape’ or Depth of Market and order flow is a critical skill which many retail traders aren’t even aware it exists. Being able to read the order flow and depth of market will greatly increase your chance of success as a trader. The retail market doesn’t even get access to this, but you can get cheap data (like the professionals look at) via Apex Trader Funding, and the platform NinjaTrader.
Market Function: Another little known skill for retail traders, is market function. This is the way in which the market functions in terms of orders, timing of the market open and close and how the market rules come into play. To learn about market function, check out these guys, who are professional index traders.
Technical Analysis: Reading the charts and using indicators to understand where the price is now in comparison to its historical price is helpful in determining what condition the market is in (Is it balanced, imbalanced, normalized or extreme?) and can also help to visibly show where price is happy to be traded and where it moves away from. While technical analysis isn’t a great ‘trading’ skill, it helps to determine areas where you start to employ the skills you develop as a trader. For example, trading (buying, selling and managing risk) isn’t about reading the charts, but knowing the price where you want to trade is essential for preparing your trading day and allows you to be patient and wait for prices to be reached before engaging in trading.
Fundamental Analysis: While fundamental analysis is important to understand, unfortunately it doesn’t necessarily help when it comes to trading. The market isn’t always ‘rational’ and often trades in the opposite direction to that which fundamental understanding would point to.
Strong Mentality: Sticking to a risk management plan is important and keeping to it can be challenging when the market goes against you. Being thousands down in the market while waiting for your analysis to start working is tough, and going in for another trade is often what drives traders into the ground. Letting it go and waiting for the right opportunity next time can see traders come undone, even the professionals.
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