The Alarming Statistics Behind Why Traders Fail

Without the shadow of a doubt, the scariest statistics you will ever hear about the horrors of trading is probably the one that states that 90% of all retail traders fail.

Another statistical fact you might have come across is that almost 80% of all day traders quit within the first two years of trading.

Unfortunately, this is the sad truth about trading.

The good news is, the failure rates are gradually coming down in recent years according to some liquidity providers.

But with the odds stacked so badly against traders, why are there still so many newbies taking the plunge?

Have you ever wondered what is causing such a large portion of traders to fail so miserably in the “Profits” department?

What are retail traders actually doing wrong?

All these are valid questions facing every single trader trying to navigate the financial markets today.

What Went Wrong During The Trading Process?

If you have researched the internet looking for answers, you might have come across a wide range of reasons why traders fail.

Although broker side issues such as “Widening Spreads” and Slippages” might be a pain in the butt.

But these problems are mediocre as compared to the wider-ranging psychological issues most traders face.

The apparent lack of a “Trader’s Mindset” is usually at the top of the hierarchy of reasons why traders fail.

Some of the other more common reasons might include the following ( Not Exhaustive ) :

• Hopping from one trading strategy to another, constantly looking for the “Holy Grail” with close to a 100% winning rate.
• Failure to match your personality with your trading methodology.
• Failure to ensure “Proper Risk & Capital Management”.
• Constantly trying to pick market “Tops” and “Bottoms”.
• Succumbing to the 5 emotional fallacies of “Fear”, “Greed”, “Hope”, “Ignorance” and “Revenge” during trading.
• Thinking that you are “Smarter” than Mr. Market.
• “Ego” issues and refusing to get out of a trade when you are wrong.
• Lack of proper research and analysis before entering a trade.

The list can go on and on just like the titanic lyrics until the whole ship has sunken to the bottom of the ocean.

All these are valid reasons why traders fail in their trading endeavors.

However, all these do not even come close to what I personally reckon is the ultimate “Achilles Heels” of most trader failures.

What Actually Went Wrong Before Trading Even Begun?

Speaking from the perspective of a trader who finally saw the light at the end of the tunnel after so many years of struggle and monetary loss.

I reckon that a few nails were probably hammered into the trader’s coffin way before actual trading even began.

So please bear with me as I gradually explain this nagging issue from my personal point of view.

Is There A Direct Correlation Between Financial Crisis & Trading?

Reckon this was one of those “Undeniable” coincidences that not many people can put their finger on it.

Why is the man in the street taking up “Trading” of the more speculative nature when the financial markets are in an upheaval?

I understand that a certain level of volaitity is good for seasoned traders.

But certainly not in the best interests of the layman who has no knowledge and experience whatsoever in the financial markets.

Having said that, I have to sadly confess.

Incidentally, my own personal trading journey also began in the financial crisis.

However, it is not during the current 2020 COVID induced crisis.

But during the previous financial crisis in 2008 triggered by the collapse of Lehman Brothers.

Similar to the current crisis, times were “Bad”.

Pay cuts across the board, retrenchments numbers were on the rise, things are looking all gloom and doom.

Ordinary folks are desperately looking for ways to grind it out when economic uncertainty puts you under immense pressure.

Rise In Popularity Of Online Trading During Times Of Uncertainty

And the only seeming “Profitable” sector seems to be the trading industry.

Much like the current rise of Robin Hood trading platforms with all their “Commission Free” trading fees.

During the last crisis, I vividly remember that on almost every media outlet, you can see multiple ads plastered across the TV, internet, and newspapers.

Excessively promoting online trading courses of all shapes and sizes, ranging from Stock Trading, Options Trading to Forex trading.

You name it, they got it.

All online and all with tons of “Freebies” to entice the unsuspecting newbie trader.

That is probably how most traders including my younger self got “Sucked” into this industry.

#1 Pitfall: Over-Hyped Expectations

In times of adversity, people will always look for alternative ways to navigate the crisis.

Luckily or unluckily….times were slightly “Better” during the 2008 financial crisis as compared to the current COVID situation.

Back then in 2008, we are facing a true blue financial crisis and not a COVID induced pandemic cum financial crisis.

At least in the last financial meltdown, we are able to go outdoors, attend live seminars, and look for opportunities to scrape a path of financial salvation.

Reckon the one good thing about attending “In-Person” seminars is that you can get a feel of the “Vibes” the trainer is giving out.

Whereas nowadays, we can’t even go out due to the massive lockdowns across the globe.

I can still remember clearly that I fell prey to an interesting ad on the local newspaper.

One that reads “Make Consistent Profits Using Our Proprietary Trading System With A 92% Success Rate”.

And on the bottom of the ad was a pretty decent looking chap citing a Ph.D. Engineering Doctorate in Computer Science.

Resume sounds impressive enough to at least attend the preview right?

From experience, previews are often “Over-Hyped” marketing events to get consumers to sign up for their courses within the shortest possible time frame.

And most trading courses are notoriously famous for their inflated claims and pushy sales pressure tactics.

Not forgetting the super hyped up “Alpha” or “Theta” type music that is constantly playing in the background.

Showcasing Only The Benefits Of Trading

Smart marketers do not “Lie”.

They just show you the good side of things that most people love to see and hear.

While not mentioning the flip side or hard truth that nobody wants to face.

Some of the seemingly “Valid” reasons these marketers will use to convince the audience often includes :

• Get out of the 9-5 “Rat Race”.
• Be your own “Boss”.
• “Recession-Proof” business.
• Strategy with a high success rate ( From X years of “BACK-TESTING” )
• Trade from “Anywhere” in the world ( As long as there is an internet connection )
• “Compound” Your Winnings To Financial Freedom.

Reckon being a small business owner myself, none of these reasons enticed me more than the last one.

The Law Of Compounding

The one universal rule touted by Albert Einstein himself as the “Eighth Wonder Of The World”.

Allow me to illustrate.

These previews will often ask unsuspecting consumers how many years will they need to work (based on their current salary) in order to earn “A Million Dollars”?

And with that “Mind-boggling” question persisting in their minds.

The trainers at most trading previews would typically use a “Simple” spreadsheet or mathematical model to wow the crowds over.

Using years or even decades of “Back-Testing” data, they would “Validify” that their trading strategy has recorded a “Positive” expectancy over the years.

The Pretense Of Back-Testing Validity

And for those who are not familiar with the term “Back-testing”.

According to Investopedia, the definition of “Back-testing” is as follows :

Back-testing is the general method for seeing how well a strategy or model would have done ex-post. Backtesting assesses the viability of a trading strategy by discovering how it would play out using historical data. If backtesting works, traders and analysts may have the confidence to employ it going forward.

The keyword to look out for is “Historical Data”.

Historical data is completely different from “Real-Time” data.

It does not take into account “Widening Spreads” & “Slippages” that often happen in real-time trading.

And all seasoned traders know that no two brokers are the same in terms of data feed prices.

The “Potential” Path To Financial Freedom

Let’s imagine if we fund our trading account with a moderate starting capital of $10K.

This coupled with conservative risk management of 1% per trade.

And based on the high winning rate ( 92% as advertised ) for the proposed strategy from all the back-testing data.

Then, making 5 winning trades of 1% each in a month is highly plausible right?

And with the “Law Of Compounding” playing its part, it will just take us a mere 7.9 years to compound our accumulated winning to 1 million dollars.

If you have no trading experience whatsoever, I reckon the majority of the audience would likely be taken for the ride.

Sad to say, my younger self was no exception.

And in case you are not aware.

The sad truth is that the very best full-time traders out there are only right around 50% to 55% of the time.

Sometimes even lesser.

Luckily albeit with significantly better risk-reward ratios for the longer haul.

Surprisingly, professional prop traders on the other hand typically have a winning rate of only around 40% to 50%.

What is saving their jobs is that the financial institutions’ “Back-End” trading desk that is monitoring and restricting their risks.

As small-time retail traders, when our expectations drift too far away from the harsh realities of trading.

Naturally, the drop-off rate will tend to be very high.

Inflated expectations for “Potential” future wealth is definitely one of the major reasons why traders fail even before they begin trading.

#2 Pitfall: Lack Of Proper Trading Education

As the saying goes, if you wish to go far in life, the best investments are the ones that you make is in your own education.

And nothing is further from the truth, especially in trading or investing.

We all need to be properly “Educated” when we are in a situation where our “Hard-earned” money is at stake here.

If we agree on the assumption that the amount of education we undertake now is “somewhat” proportional to the potential income we may receive in the future.

Then it pays to invest in our personal education right?

Perhaps this might be the reason why so many people aspire to be doctors, lawyers, and architects.

Well, all I can say is that some may choose this path not purely because of the “Good” these careers can help in the medical, social, and infrastructure industry.

But also how “Plentiful” the salary can be for such desirable occupations going forward.

If you look at the “Common Denomination” for all these high paying jobs, all of them takes almost double the required study time of a normal bachelor’s degree.

Did you know that it takes almost 8-11 years of study to become a full-fledged doctor depending on the field of study?

No wonder doctors deserved to be well paid for their specialized field of professionalism in medicine.

Can A 3 Day Course Earn You A Lifetime Of Income?

Now, if we were to draw parallels on the education side of trading as compared to other highly specialized professions.

We all know that it takes an extended period of study and practical experience in order to become a professional in a certain field.

Just see the medical doctor example listed above.

I reckon it doesn’t take a blind man to understand that attending 3 days or even a week’s long “Intensive” trading course will NOT help you become a profitable “Full -Time” trader straight off the blocks.

Yet, you cannot imagine how so many aspiring newbie traders did exactly that.

If trading was so “Easy” as depicted by so many of these trading/marketing courses, then why is the traders’ failure rate so high?

Why so many traders fail and give up so easily?

The simplest reason is that most trading courses only focus on the basic mechanics of trading and not the in-depth psychology aspect of trading.

The trader’s mindset or psychology in my opinion is the most critical aspect of consistent long term profitability.

Training and conditioning of your psychological mindset in response to the volatility of the market takes both “Time” & “Effort”.

“In Investing, Always Remember That Rome Was Not Built In A Day . . . And In Trading, Always Remember That Hiroshima Was Destroyed In A Day….”

#3 Pitfall: Failure To Treat Trading As A Proper Business

I believe that most marketing-oriented trading courses out there will never include this reason as part of their marketing efforts.

Sad to say, most trading courses are in the “Business” of making money from teaching students “How To Trade”.

And certainly “Trading” as an income-generating “Business”.

Do take note that there is a huge difference in meaning.

The majority of these trading courses are “Born” out of the desire of the man in the street to make a quick buck out of the financial markets.

This is especially true in times of crisis.

Just look at the number of online trading courses that have sprouted out during the current pandemic lockdown.

And newbie traders who hopped on the trading bandwagon often treat their trading efforts as “Speculative” in nature.

Or even a “Get Rich Quick” opportunity.

How Are “Real” Traders Different From “Speculative” Traders?

It is an untold truth that the majority of consistently “Successful” traders treat their trading endeavors as a proper and valid business entity.

Certainly not as a hobby type income as perceived by some “Recreational” traders does trading if and when their time and schedule permits.

According to Wikipedia, the definition of a hobby is as follows :

A hobby is a regular activity done for enjoyment, typically during one’s leisure time, not professionally and not for pay.

If you treat trading as a “Hobby” and hope that it will one day bring you a financial windfall.

Then your trading hobby will likely be a waste of time and financial resources.

Folks who are serious about their trading will definitely regard it as a legit business entity.

Potential Prerequisites For Trading Business Model

And like any brick and mortar business entities, a valid online trading business should adhere to a similar set of rules and guidelines.

These could literally translate to include the following :

(A) What Is Your Business Plan?

• This can translate to your trade plan.
• For example, are you scalping, day trading or swing trading.
• What is your “Trading Edge” in order for your trading business to prosper?

(B) What Are Your Business Goals?

• This can translate to your financial targets for a certain time period.
• For example, my weekly trading target could be +/- $500 with an accumulated monthly target of +/- $2K per month.
• The “Tricky” part here is that you can only take what the market gives.
• So it is best to have a certain range in mind.
• It is always better to under-promise and over-deliver.

(C) What Are Your Business Risks?

• This can translate to what kind of risk are you taking per trade?
• For example, I will only risk 1% of my account equity for every single trade?
• No betting the house no matter what your gut feel is telling you.

(D) What Are Your Business Contingency Plans?

• This can translate to what is the maximum drawdown you can handle in a month?
• For example, I will halt all trading activities if my account equity drops below 5% for that month.
• Better to stop and reflect on what went wrong before the mistake gets worst.

(E) What Are Your Business Operating Hours?

• This can translate to what are the time intervals that you trade for each day?
• For example, are you day trading during the opening 2 hours of the Asia session, London session, or New York sessions?
• Typically, traders fare better when they are more laser-focused for shorter periods of time.
• I believe nobody wants to stay “Glued” to their trading screens the whole day waiting aimlessly for a trade to happen.
• But I could be wrong… as I have seen many “Screen Addicts” on numerous occasions in my trading journey.

(F) What Are Your Business Assets / Liabilities?

• This can translate to the hardware infrastructure you are using for trading.
• For example, most “Hobbyist” traders love to trade using their smartphones.
• Seriously, do you think you can see and analyze the charts well on a small 6.5″ phone screen?
• This is like having a view of the sky from the bottom of a well, definitely a “Liability” in my book.
• On the flip side, have you ever wondered why institutional traders have at least 2 monitors on their trading desks?
• Personally, I trade with two 32″ monitors placed side by side so that I can have a view of the “Bigger” market perspective when trading.
• And that is what I termed as an asset for the business.

(G) What Kind Of Accounting System Do You Have In Place For Your Business?

• This can translate to your trading journal.
• I reckon this is one of the most important yet least utilized trading tools in any trader’s arsenal.
• A properly managed trade journal records not only the P/L of the individual trades.
• But also the “Emotional” feedback that traders are experiencing when taking that particular trade.
• All these will help train and condition the trader’s psychology going forward.

Although the list mentioned above is nowhere near exhaustive.

It still serves as a guide on how we can properly manage our trading endeavor as a legitimate income-generating business.

Conclusion

Many newbie traders often jump on the trading bandwagon for the wrong reasons.

Many never really spend the time to research and understand the inherent risks involved before putting their hard-earned money on the line.

Although not all trading programs that sprouted out during this crisis are scams.

But the current surge in the number of run-of-the-mills trading programs that focus on marketing rather than trading is saddening.

Please exercise caution and do your own due diligence when researching for good trading programs to learn from.

Better to choose a trading program that is reputable and has withstood the test of time way before the crisis started.

And most importantly, one that resonates and suits your own trading personality.

There may be possibly a million reasons why traders fail but it only takes just one of them to “bankrupt” your trading account.

Lastly, trade safe and prosper.

Shorten your learning curve by downloading our complimentary Elliott Wave Cheat Sheets.

For more articles on the Elliott Wave Principle, check out our other posts in our  Elliott Wave Blog.