Why Do Traders Typically Lose Money?
Overtrading and poor risk management are the main causes behind a trader losing money. A well-defined plan and the right knowledge can help.
With the proper use of software and efficient skills, trading can get you stable money tailored to your circumstances. But, a few reasons can cause the traders to lose money: poor risk management, overtrading, and revenge trading, to name a few.
Nine out of ten traders lose money, and that's no joke! This blog examines the possible causes behind traders losing their money and the remedies that can help.
How many traders lose money?
Sealing high-profile wins is common in day trading. However, despite all the temptations, they almost always lose money. Statistics suggest that up to 97% of U.S. equity hedge funds perform poorly on their benchmarks despite being run by some skilled ones.
A study of more than 66,000 households with accounts at a considerable discount broker between 1992 and 1997 indicated that active traders performed poorly on the value-weighted market index by 10.3%.
eToro conducted a study, and the result showed that about 80% of its users lost money in twelve months. Market uncertainty is a factor, but it's not every time that it runs in risk. Even when the broad market is performing upward, like in 1998 and 199, a study on 324-day traders suggested that only 36% made a profit while the other 64% incurred a loss.
A shocking fact is that 80% of day traders quit day trading within two years.
Why do most traders lose money?
The market volatility in trading is unknown to none. Day trading, one of the obvious ways to attract money, is popular these days. Of course, day traders make lots of money but lose it too. Most traders lose money for several reasons, some of which are discussed below.
Lack of education: Trading and earning profit from it is challenging. It takes the proper knowledge and strategy to understand the market and play your dice—a slight mistake, and you're doomed.
Many traders need to understand how they work in the financial markets adequately. Lack of knowledge can result in poor decision-making, eventually to a loss of money.
Emotional trading: Trading and profit is an intelligent game with rare scopes of emotion. If you let your frustrations or disappointment come your way, the chances of making the wrong decision or taking the wrong step are maximum. Emotions like fear and greed can cloud judgment. Emotional reactions can lead traders to make impulsive decisions that result in losses.
Overtrading: Exaggerating something or putting double the effort needed to make a work right. It's about the intelligent and technical ways you adopt to execute the right strategy in trading. That's why overtrading is a big no.
Some traders trade too frequently, incurring high transaction costs and increasing the chances of making mistakes. Usually, after losing a streak, many traders aim to recover the losses with larger position sizes and expect a turn in the game. Unfortunately, overtrading only yields poor results. Learn also about how to deal with win/lose streaks in forex trading to avoid significant financial losses.
Poor risk management: Failing to set stop-loss orders or risking too much capital on a single trade can lead to significant losses. Many traders take more prominent positions than their respective accounts' size. Poor risk management techniques often lead to loss of sums for day traders.
Lack of discipline: Following a no-discipline line only invites harsh consequences, and it is right for many traders. Not to mention, it is among the prominent reasons why traders lose money. Consistency is crucial in trading. Deviating from a well-defined trading plan can result in losses.
Ignoring fundamental and technical analysis: Another crucial point is when traders need to adequately gauge the fundamental and technical analysis to advance with the trade. Avoiding research and analysis can lead to poor trade entries and exits. Successful trading comes with multiple aspects like educational training, self-discipline, risk management techniques, and a well-designed trading strategy.
Top 6 tips to succeed in trading
Before starting trading, it's essential for you to understand the market and prepare a well-thought-out plan. It will help you analyze the market intricacies and stay on track. We have listed six solid tips to help you plan a successful trading career.
Educate yourself in detail about trading and the market
Before pursuing this complex field full time, you need to understand the fundamental concepts of trading. It includes how the market works, potential risks and how to manage risks as well. Investing time in learning about various trading strategies and asset classes will help you make yourself a successful trader.
Have a trading plan
You can only move forward with a particular plan that defines your goals and analyzes your strategy. Create a well-defined trading plan to include your objectives, risk tolerance, entry and exit strategy, and money management rules.
Risk management
It is the most important aspect of trading you need to master. Risk management will make you able to survive in the trading world. Limit your risk on each trade by setting stop-loss orders. You must never risk more capital than you can afford to lose.
Learn to have emotional control
Emotional mastery is another key point to remember when you're new to trading. There are times when you will be disappointed, angry or upset. But standing out in the market will require you to keep your emotions aside and make practical decisions instead.
Practice emotional discipline. It's important to avoid making impulsive decisions out of fear or greed. Stick to your trading plan.
Start small
The most underrated advice you'll hear if you are new to trading, but you must keep it in mind to avoid risks in the long run.
If you're new to trading, begin with a small capital and trade more minor positions. As you gain experience, you can increase your exposure.
Stay updated
Have a keen attention to detail about how the market and numbers are working. If you need to catch up to the current information, that's a problem. Keep up with financial news and events that can impact the markets you trade-in.
You must remember that trading includes inherent risks and no guarantees of success. It's essential to approach trading with caution and a practical mindset, understanding that losses are part of the game.
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FAQs
Is trading like gambling?
They seem to be the same for some particular features but are not. In trading, yield might be more significant than risk, but in gambling, risk is greater than yield.
What time is best for intraday trading?
The ideal time for intraday traders is between the morning and afternoon, typically between 10:15 a.m. and 2:30 p.m.
What is the primary reason for traders losing money?
There are various reasons why traders lose money, but risk management is the biggest reason. Most of them fail at this and need help making an informed decision.
Is day trading a skill?
Being a day trader requires in-depth knowledge of trade markets and financial investments. One must be highly skilled to pick it up as an income source.
Glossary for novice traders
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1
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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Risk Management
Risk management is a risk management model that involves controlling potential losses while maximizing profits. The main risk management tools are stop loss, take profit, calculation of position volume taking into account leverage and pip value.
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Day trader
A day trader is an individual who engages in buying and selling financial assets within the same trading day, seeking to profit from short-term price movements.
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5
Overtrading
Overtrading is a phenomenon where a trader executes too many transactions in the market, surpassing their strategy and trading more frequently than planned. It's a common mistake that can lead to financial losses.
Team that worked on the article
Upendra Goswami is a full-time digital content creator, marketer, and active investor. As a creator, he loves writing about online trading, blockchain, cryptocurrency, and stock trading.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).