Why most people fail as retail traders

I see two main reasons which complement each other for the high rate of failure.

First and foremost, the media and the industry promote this idea that it’s easy to become a profitable trader and anybody can go it. This is, of course, not true. Theoretically anybody can do it if willing to put the effort and approach it as a business. Practically almost nobody approaches trading with the same rigorousness as any other professional endeavor.

Let’s put aside the first reason, about which there is not much we can do. A big chunk of the industry relies on peoples being naive and we’re not going to change that. On top of the first reason we have a second reason related to people themselves. Most of those who try trading financial markets simply don’t manage their emotions and risk well enough to survive the learning curve.

Managing your own emotions turns out to be a complex endeavor and constantly changing market conditions lengthen the learning curve. One of the things that makes this business so attractive is also the main thing that makes it so difficult to master.

The direct and sometimes violent feedback you receive from the market, after each trading decision, has an astonishing impact on a human’s ability to keep his psychological well being in check and control his own reactions. It has the potential to disrupt executive functions and trigger instinctual “fight or flight” responses. This leads to emotional trading or trading on tilt which quickly generates more losses than any other mistake you could make in this business.

Most other jobs have a protective buffer zone between usual day to day work decisions and the ultimate feedback — end of the month paycheck. This profession doesn’t. Every little call you make has an immediate impact on your capital. Every little mistake can take a portion of your capital away and every good decision can bring it all back and more. This kind of psychological exposure is heavily distressful and being aware of it’s mechanisms makes a huge difference.

So … psychology differentiates the pro. Don’t get me wrong … professional discretionary traders are not emotionless but are much more aware and in control of their reactions. The successful pro deeply understands that trading is mainly about people perceptions and the rest are just details.

You may ask yourself how can such a level be reached? A starting point is to stay away from any market, financial instrument, time frame, trading technique or any combination of those that doesn’t fit who you are deep inside. The least the exposure to triggers that can awake the demons within, the best.

Always seek strategies that you understand and match your inner self. For example … if you are impatient trade shorter time frames, if you are very risk averse don’t use huge margin, if you are risk averse but you don’t have enough capital use margin with a tight risk management (maybe options), if you have a statistical mind try quantitative approaches etc. There are infinite possibilities to adapt to yourself and is a must to do it if you want to have a chance.

It always amuses me to see the vast majority of educational resources geared towards what market does when most of the success in this business is knowing how you adapt to the market, whatever it may do. And, of course, the market is, more or less, the other traders.