Why most People fail at Trading!

Why Most People Fail at Trading! (first published in The Financier magazine last month!)

Most individuals that consider trading as a profession are not prepared for the hard work and dedication it takes to become a trader.

The second issue is not having enough capital behind them. Ideally, they should already have a steady income and therefore can take the slow approach towards becoming a trader. This is important as it removes the need to make money daily. Trading is about probabilities and traders should only be considering the high probability trades, its quality over quantity!

Before you enter the world of trading you must consider the maximum amount you will invest in yourself to become a trader. Once set this should not be broken for any reason! It’s very easy for many to open a small account and then keep topping it up if they lose, however, this can lead to a massive erosion of their hard-earned capital without realising it! With a fixed amount you will track it much tighter and control it better.

Having to make money to cover bills means traders rush into trades, grab at profits, set their targets too high – which in turn leads to taking on riskier trades and disappointment when they do not reach their target.

Many begin trading without enough practice behind them to create a solid trading plan. A set of rules built to protect them from losing too much capital in any one trade on any one day! It also includes the criteria the market must meet before a trade is executed. Creating a solid trading plan helps develop consistency which is essential to a trader. It’s important to understand not just the market and the product you will trade and it’s also important to understand yourself!

As a professional trader when I am considering taking a trade on the first this I do once I have identified my entry price is to establish where my stop loss should be placed as this provides the potential loss should the market go against me. Once I have established that I can calculate the potential profit I can make from the trade – this establishes the risk/reward in the trade. Another consideration is something I call the three Vs – Volume versus Volatility. The higher the volatility the less volume (size) to commit to the trade as this allows for the market to go further against you without increasing the potential loss. Most trades will go against you before moving back in your favour…if they are going to!

Many traders lack discipline due to poor risk-reward ratios. This makes trading more challenging as they then increase the need to win more trades. I always recommend a minimum 2:1 as this means even if you are right only 50% of the time you will still be ahead. This should not be so rigid that if you feel the market will not quite get your price you hold out as then the trade will lead to a loss. It’s okay to accept less on some trades as when you have a strong feeling it is possible to aim for higher profits. I always aim to maximise my profit in every trade and create zones rather than a single price. I will identify the price I expect the market to be rejected at and place a series of orders in front of that price. My stop loss will be either based on the average price or individual stop orders against each entry price with the loss very similar in value regardless. When the market is moving in my direction, I begin to exit the position a little at a time to gain a good average, just in case the market reverses. Zones again offer flexibility!

Another issue is traders do not understand the product they are trading. They are unaware of the fundamentals that impact the product which impacts their potential to profit from trades or cut losing one’s early when fundamentals change. Correlations between various products or asset classes can also be very useful for this! If a trader is trading a contract such as the S+P its useful to know the companies that impact the index the most. I always suggest learning the top 10 companies or make a list of the top 10%. Imagine holding a long position and positive news breaks regarding one of those companies. It provides you with the insight to add to your long position or remove your sell order as there is probably a lot more profit to be taken from that trade! Alternatively, if the news was a negative it would give you the opportunity to exit your position early or even reverse it!

I offer a variety of courses to provide individuals with the best possible chance in trading, including an accredited course from the middle of March that is very competitively priced at only ￡2,750 (cheap, especially if you are overseas!) I offer face-to-face in London (this is ￡3,500) or online in my interactive state-of-the-art virtual classroom.

Contact me at [email protected] for more details.