longonlyitis
Why Do Most Traders Lose MOney?
- Thread starter McCloud
- Start date
Many traders know what they need to do but once you put that trade on your heart begins to POUND, your mouth gets dry, your hands {{tremble}} and then your eyes glass over (*v*)...heh heh now it's all over except booking the loss
From my experience, most traders fail to understand the two critical ratios. Win/Loss and Profit/Loss. Most of us focus almost all our efforts on finding the perfect indicator, the perfect setup, the perfect edge. In reality, most traders will never get past 60/40 Wins to Losses. What kills you then, in the long run, is a bad profit/loss ratio. This happens in two ways.
#1, holding on to your losses in hope they turn to winners
#2, Cutting your profits short to lock them in.
These kill you because over the long haul, all you are doing is increasing your losses and shrinking your profits, all the while trying to increase the one ratio you have less control over, and that is win/loss. The one ratio that you have dead on control over is Profit/Loss ratio. If you hover near 50/50 win to loss (Coin toss), but you are disciplined about profit/loss ratios, you will be a successful trader.
This is where capitalization comes in, because undercapitalized traders tend to cut profits to protect them, and end up killing themselves in the long run. They bleed to death from the fear. You have to have the capital to sustain the inevitable string of losses that come to every trader
#1, holding on to your losses in hope they turn to winners
#2, Cutting your profits short to lock them in.
These kill you because over the long haul, all you are doing is increasing your losses and shrinking your profits, all the while trying to increase the one ratio you have less control over, and that is win/loss. The one ratio that you have dead on control over is Profit/Loss ratio. If you hover near 50/50 win to loss (Coin toss), but you are disciplined about profit/loss ratios, you will be a successful trader.
This is where capitalization comes in, because undercapitalized traders tend to cut profits to protect them, and end up killing themselves in the long run. They bleed to death from the fear. You have to have the capital to sustain the inevitable string of losses that come to every trader
Thank you all for your input, it is obvious there are some experienced traders on this board, some of what was said on this thread come after many years of trading IMO
In a way, every single response makes sense! Maybe all those issues are somehow related to one another and that is what makes trading so hard after all! If undercapitalize, then the fear factor will come in play and the trader will be trading with scared money. The overtrading maybe is triggered by greed and also lack of money management. But lack of discipline seems to be the core of all of the above problems.
The interesting issue here is the fact that the majority of votes is almost split between Discipline and Emotional Trading, Fear/Greed factor, are these two issues related to one another or do they represent different behaviors? Is Fear/Greed factor a âpersonalityâ issue that is harder to change? Is that what explains why many traders will always have a hard time trading?
Maybe we can learn how to be disciplined with experience and practice but can Fear/Greed factor be controlled by discipline alone or is that always going to be a problem?
In a way, every single response makes sense! Maybe all those issues are somehow related to one another and that is what makes trading so hard after all! If undercapitalize, then the fear factor will come in play and the trader will be trading with scared money. The overtrading maybe is triggered by greed and also lack of money management. But lack of discipline seems to be the core of all of the above problems.
The interesting issue here is the fact that the majority of votes is almost split between Discipline and Emotional Trading, Fear/Greed factor, are these two issues related to one another or do they represent different behaviors? Is Fear/Greed factor a âpersonalityâ issue that is harder to change? Is that what explains why many traders will always have a hard time trading?
Maybe we can learn how to be disciplined with experience and practice but can Fear/Greed factor be controlled by discipline alone or is that always going to be a problem?
Here's a paper on the subject of losses and how the pro's handle them.
http://www.behaviouralfinance.net/papers/loss_realization/LoMa00.pdf
http://www.behaviouralfinance.net/papers/loss_realization/LoMa00.pdf
SECRET TO SUCCESS:
Oh I get we should cut our losses before they turn into winners and....
Hold our winners till they become losers.
Don't lock in that profit sports fans,
and sell those "losers" right away ...CHURN THAT ACCOUNT HA!
First of all, it's not so much fear and greed as it is fear and hope, and the fear is generally triggered by doubt and anxiety. So, it helps to figure out just what it is that you're so doubtful and anxious about. Most often, it has to do with not being able to trust the plan, and there may be several reasons for that.
But if the plan is a good one and can be trusted (through extensive realtime forward testing), one must then take the leap toward the discipline to trade it. That is an observable, manageable, controllable behavior (whereas fear and hope are ill-defined and fuzzy). And once that discipline is achieved, the fear and hope are not much of an influence, if any.
--Db