Traders fail for many reasons, but few fail because of the markets or the timeframes or the indicators. Most traders fail because of their psychological approach to trading. Most new traders fail to become successful at trading for the same ten reasons. By being aware of these psychological traps, you can avoid them.
#1. Easy Way
Many traders begin trading believing that it is easy. They think trading must be easy because price either goes up or it goes down. However, price can also go flat, or move just enough to stop the trader out at every turn. Some traders erroneously believe they can just pop into a trading room and do whatever the moderator does and become rich. This is a recipe for failure. The trader in this situation is trading blindly. The trader has placed himself at the mercy of the moderator and the internet connection that they share. If the internet connection goes down this trader will not know when to exit a trade since he or she is not truly trading, but is playing «follow the leader.» Successful trading is based on many factors that a trader following someone over the internet may not have in common with the moderator. Does the trader have the same risk limits as the moderator? What is the account size difference between the moderator and the «watcher»? All these are unknowns and the trader is blindly putting his money at risk without understanding what he is doing.
Trading is a profession. Like any profession, trading requires both knowledge and skill. Knowledge can be gained from books, but skill can only be gained by experience. Like most professions, the trader cannot learn everything they need to know from a book. Trading is a lot like the medical profession. First, the trader has to study the methodologies and then he has to learn to apply the knowledge gained on the live edge of the market. Only on the live edge of the market, can a trader develop skill in applying the knowledge they just gained through study.
During the skill building period when a new trader is applying methodologies on the live edge of the market, they will need to face and overcome their own psychological shortcomings. This is when they discover many of the inner demons that may keep them from becoming successful traders. For example, it is quite easy to say, «I will only take a trade if XYZ occurs.» However, on the live edge of the market, can the trader stick to their rules? One of the most difficult aspects of trading is being able to admit to ourselves that we are not perfect and that we have to work on ourselves.
There is no shortcut. A failure to learn the methodology, the failure to design a business plan, or the failure to address your short-comings will only guarantee FAILURE. On the other hand, learning the methodology, designing a business plan and choosing to address your short comings, puts you squarely on the road to becoming a successful trader.
What makes you so special that you feel entitled to winning? Have you done the work? Have you spent countless hours studying charts, volume, and the way the different markets work? Do you really believe that the markets care about you, your money, or your status? It doesn’t. The markets have crippled many traders and you are no different. When you sit in front of your computer you can believe one thing — the market will do whatever it wants to do and, if that means blowing you away, it will. You must learn to approach the market with respect and caution and to realize that the market is impersonal to you and to your thoughts about it and expectations of it.
You are afraid, plain and simple — so is every other trader. The difference between a trader who is failing and one who is succeeding is that a successful trader does not allow fear to overcome him. A successful trader sees fear for what it is — a feeling that is completely normal. After consciously acknowledging the fear that they feel, a successful trader will move on and do what needs to be done. By allowing fear to overcome him or her, the unsuccessful trader will sit paralyzed, unable to make a move in any direction.
Fear serves an important purpose in our thought processes. It is the first step we take in problem solving. So, what is it you are so afraid of and what is the worst case scenario of any trade? When we write down our thoughts and ideas, it starts us on the road to thinking and planning. By establishing a process where we think the issues that a fear brings before us and by planning on how to respond in a functional way, we can identify problems before they occur and ensure that we know what to do when they arise. By having a plan in place to address issues before they occur, we diminish the power that fear holds over us. By acknowledging a fear and then deciding what to do about it ahead of time should the fear become a reality, we know that we can successfully move past the fear. By this process, we become less fearful and more functional.
Negativity begets negativity. The reason is simple — your subconscious mind works to fulfill your wishes. Your subconscious mind is a faithful servant to you and to your thought processes.
If you think you are going to lose, your subconscious will ensure that you do lose. Think you are going to fail, your subconscious will provide failure.
As a trader, it is important to your success to know and understand what it is that you actually believe about your own success as a trader. Think you are going to be a winner and your subconscious will automatically seek ways to make you a winner. Think you are a professional trader that adheres to a strict methodology, and your subconscious will seek ways to ensure that you are one.
How much do you want to bet you have suffered from paralysis by analysis? Instead of taking the opportunity when it presents itself, have you ever stayed stuck in analysis mode? One of the reasons to have a trading plan is so that you don’t have a lot of analyzing to do on the live edge of the market. On the live edge, the answers should be quite simple: either «yes «or «no.» YES, you take the trade because XYZ occurred or NO, you do not take the trade because XYZ did not occur. On the live edge, STOP analyzing and start trading your plan. The successful trader knows when to analyze and when to act.
#6. No Goals or Plans
You will not become a long-term successful trader if you plan nothing or if you decide to «fly by the seat of your pants». Magical thinking leads to trading failure. You cannot believe that someway, somehow, everything you always wanted will magically happen. More than likely if you believe this, it is because you have a sense of entitlement. (See #2 on Entitlement above.) Successful traders are successful because they devote the time to create goals and develop a plan to achieve those goals, as well as meaningful ways to measure their progress. Without a destination, it is impossible to create the map. To be a successful trader, it is important for you to have measurable goals with a definite plan to achieve them.
Instead of accepting responsibility are you are always the victim? If you believe yourself to be a victim then you are setting yourself up for failure. Victims tend to be victims of everything: victim of the markets, victim of the timeframe, victim of the latest indicators or methodology. The truth is that you are responsible for your own success or failure. There is no secret group of people, markets or indicators that control your success or failure. Although it makes you feel better to believe you are a victim, you are only a victim of your own shortcomings. You and you alone control your success in trading. To become a successful trader, you must take responsibility for yourself and discover for yourself that the point of power in becoming successful is in controlling your own thoughts, actions, and beliefs.
#8. Following instead of Leading
You have set yourself up for failure if instead of setting your own goals and path to success, you rely on others to come up with «the magical formula» for you. There is no magical formula. Success is personal. It is counter-productive if you find that you want to follow anyone else’s path to success. Every path to success is as unique as the person that walks it. While mentorships are useful for learning what you do not know, ultimately you have to begin leading yourself down «YOUR OWN PATH». That path begins with setting your own goals and then planning the route to achieve those goals.
Passion is the driving force that makes a trader want to learn, to study, to do. Passionate traders are eager to start their day, eager to learn, and eager to watch every movement of price. They have a need to know what is happening in other countries, as well as the effect it will have on the markets.
You know that you are lacking the necessary passion for trading when you want the money that comes with becoming a successful trader, but you don’t really want to trade. You are lacking passion for trading when you find yourself thinking that it’s boring spending hours in front of a computer screen when you could be out partying, lying on the beach, climbing mountains, or doing a hundred different things. If this is how you feel, then it is best that you save your money and time and find another profession. It takes passion to become a successful trader. Passion for trading gives you the driving force to sit hours on end in front of a computer screen. If you are missing this driving force, this passion, you will miss critical details simply because you are not engaged with the screens or the price bars. Only you know if you have a passion for trading.
Do you lack the confidence to achieve your dreams and goals? It is easy to say that success is dependent on a trader’s social or economic level. However, the truth is that you have the choice to believe in yourself and your own abilities or to allow yourself to give up without achieving your goals. Your mind may have convinced you that if you accept failure now then you are saving yourself the pain of failure later. This is a lie.
The truth is that without trying, you will definitely fail. Yes, sometimes, at first you will fall flat on your butt. Then you get up and try again and again until you achieve your goal.
Every successful trader has been through similar failures. The difference is that successful traders continue to get up after being knocked down by the markets. We accept the lessons that the markets offer and then move on. With each new failure and our ability to learn from failure and to overcome future failures grows and we build our confidence level. Each failure becomes the key to greater success for the trader who has the confidence that it takes to learn a lesson and move forward.
In summary, remember it is «you» and your personal psychology that is most important element for success in trading. «You» are the unique element that you apply to the methodology, the market and the indicators. Only though self-honesty and self-awareness can you become a successful trader. I have listed the ten most common ways that traders sabotage any success that they might have had. All ten of the reasons for failure have to do with the personal psychology of the individual trader. Though developing the mindset that it takes to be successful in trading is often overlooked, it is the mindset that you bring to trading that will either lead to your failure or to your success. Addressing this essential element of trading on a daily basis is crucial for your success as a new trader.