I’m not sure I believe the statistic, but I can’t tell you how many times I have heard it: 90% of traders fail.
To avoid becoming a statistic, it’s important that you avoid the big pitfalls of trading. Keep in mind that not every trader makes money, but if you want to give yourself the best chance of success, you’ll avoid these five trading dangers:
An Unworthy Mentor
One of the main reasons for traders failing is not having a strong mentor. Most successful traders had a money-making, battle-tested mentor at one point or another in their career.
Working with a mentor is like going to school. You’ll need a teacher who has traded and knows well the markets and their intricacies, just as you needed savvy teachers and professors to show you the ropes in college. When you work with a mentor, you’re essentially leveraging their knowledge and looking to them for tips and ideas until you can figure it out on your own.
A light attitude about trading
Trading is serious stuff, and most traders who have failed have not taken trading seriously. Like most things in finance, trading is a business; you’ll need to work hard and dedicate a large portion of your time to learn in order to perform well. Many failed traders did not put in enough time or dedication, or simply gambled with their trades and their methods instead of making every trade count.
When first starting out, don’t churn. In other words, don’t overtrade. If you’re bored and just want to trade, sit on your hands and be patient until a real opportunity arises. Trading is not like any other job, you don’t get rewarded hourly or just for showing up. You’ll have to select opportunities that fit your trading style. If you trading just for the sake of trading or because you’re bored, you’re overtrading; consequently, you’re spending a bulk of your capital on fees, which could eat into your account and keep you out of trading your true prospects if your account dwindles because you were busily and actively killing time.
Improperly managing positions for risk
Another common pitfall that some traders fall into is not properly risk managing their positions.
Let’s acknowledge that trading is emotional, and that you can get caught up in trading and hold onto a losing position. With that in mind, learn to cut your losses, before they get too big and cause you to lose the bulk of your trading account.
Gambling, or not trading a favorable risk-reward ratio
As we briefly covered a moment ago, traders who have failed may have gambled. You generally don’t want to trade stocks with a low risk-reward ratio. For example, if you see that you would be risking $1 to make $1 per share, you’re facing an unfavorable risk-reward ratio; that’s a gamble.
Look to trade stocks with greater risk-reward potential, such as 1-to-3 or 1-to-4, if you can find them. Gambling also falls into the realm of not sticking to your plan. For example, if you’re a technical trader and only plan to trade when you see specific patterns, you’re gambling if you let your style drift and trade outside of your plan.
Successful traders avoid these five common pitfalls. If you find yourself getting tangled up in any of these dangers, change your attitude and strategy before it becomes a bad habit, and focus on the right trading behaviors so that you can make it in this business.