Psychology
Why Traders Lose Money
When it comes down to it, the reason 80% of traders lose the majority of their capital is due to a lack of emotional control, which leads to poor decision-making. One poor decision can quickly spiral into ten and a blown account.
- Overleveraging
Overleveraging is the act of a trader placing far more risk on their positions than that which is recommended (up to 2% per position), also known as over-risking.
The problem with over-risking is that the more capital you put at risk, the harder it is to make sound decisions.
It’s driven by a form of greed that expects one to gain unrealistic, outsized returns.
By focusing on being able to take the next trade, instead of trying to win it all in one trade, long-term profitability is almost assured.
This is the case if the strategy a trader uses is reliable and proven; having a market edge.
The losses incurred by over-risking can then lead to revenge trading:
- Revenge trading
Revenge trading is trading with the mindset to forcibly make a loss back in as little time as possible.
It usually stems from placing too much risk on one position, and regretting it after a trade hits the fan.
You can avoid the revenge trading mindset by realizing that even the best traders lose, and no trading system is without losses.
There is no need to try and make it all back in the same day — the market is here for the long-term. Good setups present themselves often, but with a vengeful mindset, you’ll end up missing out on them and take more losses.
By lowering your risk per position, you are effectively gaining more capital by being able to make sound decisions.
By increasing your risk beyond 2%, you are increasing the emotional pain that a loss can bring, potentially leaving you and your capital in a more vulnerable state.
- Lack of discipline
A lack of discipline in your overall life can easily bleed over into your trading style.
It’s important to realize good results in trading don’t come without the consistency of good habits:
- Reviewing one’s positions to seek improvements
- Using appropriate risks
- Waking up and trading at the same time every day (healthy sleep schedule)
- Knowing when it’s poor time to take a position
- Following every rule in one’s trading plan
What a lack of discipline looks like:
- Trading at random times of the day
- Averaging down — adding positions in drawdown without rhyme or reason
- Risking capital one cannot afford to lose
- Delayed entries due to fear
- Unnecessary trade exits
- Not sticking to one’s trading plan
- FOMO — Fear of Missing Out
FOMO has two forms — it can be self-inflicted by chart-watching, or stem from focusing on the trading results of others, and feeling that you need to replicate their level of success.
Always remember that sometimes not entering a position is better than doing anything at all. If you have missed an entry, know that the next valid entry is around the corner.
You should either have exactly everything you are looking for in a position, from entry point down to the stop loss size, or not be in a position at all.
Trading is an independent journey, so your focus should remain on your own results. What is seen on social media is often fabricated or exaggerated in the hopes of gaining a following or trying to sell something.
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