Why do traders fail: some random thoughts

Trader fail because they care to much about their EGO.

"Hey I'm a day trade ..., I have a big ..."

Trading is boring and trading is simple. Trading should take less than 60 min per day. It should be a hobby that compliments your lifestyle; it shouldn't be your lifestyle.

The market doesn't care who you are, what you do, what color you are or how big your ... is. The market is a level playing field, a great equalizer for mankind.

The greatest traders are clinical sociopaths who don't care if they win or lose. They don't care for tips or the opinions of others. They don't care for the lime light. They coolly and objectively engage the market on their own terms and make profits their own way.

Traders fail because they define themselves by the size of their profits, and when they lose, it makes them a loser.

Winning traders define themselves by the quality of their relationships with family and friends, their community spirit and the meaning they help create in peoples lives. Their profits give them the TIME to develop these qualities.

pneuma
 
Quote from samus:

IMHO... Traders fail because of fear. Traders who trade with fear are not consistently profitable over the long haul. Those that can trade with a carefree state of mind are the most successful.

You can study technical analysis until your blue in the face... but it will never completely conquer or manage your fears. I use TA to give me an edge... thats it. It serves nothing more than to define an edge -- the probability that the market will move in my direction. If it doesn't, I exit the trade when it hits my pre-defined risk and consider the small loss as the cost of doing business.

I recently started trading full time and could only make the move from a good paying job as a software manager once I learned to eliminate fear from my trading.

I'm consistently profitable and make more money than the job I recently quit. Learn to manage your fears, eliminate the stress and take advantage of the opportunities the markets make available every day.

An excellent book I recommend is "Trading In The Zone". Once I read this book, I threw all the others out.
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People throw the word fear around without defining it. Let's spend some time identifying fear.

If fear is an object, I want you to point it out to me. You hesitate. You claim it is inside your head, I cut your head open, and fail to find it. You claim it is in your heart, I cut your heart open, fear is not there. So it is logical to conclude that there is no fear.

So what is fear? Fear can be defined as either cognitive process/thoughts/thinking, or physiological responses such as sweating.

Let's focus on the first definition:
Our mind doesn't generate thoughts on its own, it does so after being stimulated by outside forces. Could the outside forces be a series of losses in trading? I guess this sequence of events (losses-->fear) is very common in trading. If you agree, you must also agree that fear comes AFTER losses. Next time you blame fear for your losses, you should try to remember where the fear comes from in the very first place. Therefore, the sequence of events might look like this: losses-->fear-->losses. If you swear by the Bible that your fear comes before you even start trading, let me guess that your fear is based on other people's losses (vicarious experience, that is. You heard it, you read it, you observed it. That's why some people are afraid of snakes before being bitten by one. By the way, 95% of human knowledge is vicariously obtained. Don't ask me where I got this "95%.").

You are not afraid anymore, because you are not losing anymore. The sequence of events should be: wins-->disappearance of fear. It cannot be the opposite way. To win, you need to lose a lot, that's the reason that some say you need a large account to survive the learning process. Since 95% of human knowledge is vicarious, you might as well find someone who has already gone through the learning process, which is full of losses. If you want to know whether breaking a leg bone is painful, you don't have to break your own leg to know that, you simply ask someone who broke his leg. In trading, you find a mentor who blew his account once or twice, so that you don't have to blow your own account. It must be emphasized that direct experience is much more impressive than vicarous experience.

OK, back to outcome. Two outcomes: pleasant and unpleasant. Each outcome comes at two levels: physical and psychological. Since trading involves money, let's focus on physical outcome.

A pleasant outcome has two types: win money and avoid losing money. An unpleasant outcome also has two types: lose money and fail to win money. Now we have four possible outcomes that determine the trading behaviors. The pleasant outcomes (win money and avoid losing money) increase any trading behavior that leads to the outcomes in the first place (After all, outcome is the result of a prior trading behavior); the unpleasant outcomes (lose money and fail to win money) decrease any trading behavior that leads to the outcomes in the first place.

To explain the above ideas, let me use a very simple example: you put your hand on a burning stove (behavior) and get burned (unpleasant outcome, pleasant smell though), you won't do it again (decrease of behavior, actually total disappearance to many people).

I know, you are asking yourself: Why the hell did I do it again and again?
 
I think there are several reasons why traders fail.

1. Trading is a one man business which means we have to be
%100 responsable for outcomes as well as record keeping, money management, hardware aquisition and maintenece, position sizing and moneymanagement, risk management, account management, broker relations management, platform management, tax management, continuing education.

2. The learning curve is enormous we have to learn what dos not work befor we can learn what does work. So we try stochastics, moving averages, ADX, LRCs, bollingers, keltners, the list goes on and on for ever until we learn that price is king and that as soon as we have a directional bias and get married to a position we are screwed. The old adage, "would you rather be right or make money?" is appropreate here. We trade live much too soon, there are no restrictions on opening an account and we have a pocket full of money and unrealistic expectations for success. Make all your mistakes paper trading.

3. We do not use statistically sound methods of testing our systems. We use set ups that are impossible to execute consistantly or quantify, therefor it is impossible to form any type of confidence in our expectations of our "system" so we abandon it or start tweaking it when we take a few or several losses. For a beginning trader if the system is is not mechanical your goose is cooked. Take 100 trades with a hard stop and target live on paper using your System then analyze the results.
 
Quote from 4DTrader:

OK, back to outcome. Two outcomes: pleasant and unpleasant. Each outcome comes at two levels: physical and psychological. Since trading involves money, let's focus on physical outcome.

A pleasant outcome has two types: win money and avoid losing money. An unpleasant outcome also has two types: lose money and fail to win money. Now we have four possible outcomes that determine the trading behaviors. The pleasant outcomes (win money and avoid losing money) increase any trading behavior that leads to the outcomes in the first place (After all, outcome is the result of a prior trading behavior); the unpleasant outcomes (lose money and fail to win money) decrease any trading behavior that leads to the outcomes in the first place.

To explain the above ideas, let me use a very simple example: you put your hand on a burning stove (behavior) and get burned (unpleasant outcome, pleasant smell though), you won't do it again (decrease of behavior, actually total disappearance to many people).

I know, you are asking yourself: Why the hell did I do it again and again? [/B]
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This may sound like a puzzle, but if you spend some time thinking about it, you may solve some or all of your trading problems:

If you keep doing something bad, it must have a pleasant outcome (technical term is positive reinforcement and negative reinforcement). Just think of a bad thing you have done repeatedly and the possible pleasant outcomes it has brought to you.
 
Smoking is a behavior, if you want to stop it, apply unpleasant outcome. Logic is simple. However, smoking has pleasant outcome: mental relaxation (nicotine does wonders to brain cells), social acceptance (in a party environment), perceived coolness in the eyes of girls (Welcome to the Marlboro country), etc. These pleasant outcomes compete with the unpleasant outcomes (sore throat, coughing, lung problems). If the unpleasant outcome is delayed (lung cancer happens 35 years later), it has little effect on your quitting.

Trading has a number of bad behaviors. I found a post under a different thread started by another trader, it listed two bad behaviors:

"01-02-08 02:04 AM

When it came down to it, a disregard for getting out of bad positions (i.e. using stops) and a general lack of discipline (i.e. adding to losers) prevented me from reaching my goal in 2007"

Bad behavior 1: "disregard for getting out of bad positions."
If you refuse to get out of a bad position, you will be punished=losing money. But not always. Sometimes, you will be rewarded. How many times do you hear a trader say: if I had held a little longer, I would have caught the rebound and recovered all my losses; or I shouldn't have sold it, because the market had reached the bottom; I should have a little more patience, I was too scared; or next time I am going to widen my stop loss so that the downward fluctuation/noise will not stop me out, etc. All these remarks are indication of traders seeking rewards for a bad behavior. In reality, it does get rewarded from time to time. A guy shorted a RIMM weeks ago and the stock kept going up, he was in deep shit. He refused to cover, until last Friday. He not only recovered the loss, but also made some money. Do you think he will get out of a bad position next time? I don't think so. A rewarded behavior will continue.

Bad behavior 2: "adding to losers." Again, successful traders know that's not good, actually, it's very bad, as bad as the first bad behavior.
Again, this behavior is not consistently punished by the market. Many traders actually got out of a deep hole by averaging down. If a bad behavior is punished every time you demonstrate it, you will not do it again. Has anyone tried to drive the wrong way on a busy highway? Well, I guess those who did are not in a position to answer that question.:( But in trading, we keep driving the wrong way and getting away with it. We traders are lucky people, those airline pilots don't have this luxury, if they push the wrong button, hundreds of people will go up in flames, and the pilots will never be able to push the same wrong button again.
 
hey i just thought of something.

if got in a car never having driven a car - and when you turn the wheel the tires went in the opposite direction.

now what if you have driven a normal car and you get in the car that steers the opposite direction? see.

so be very careful what you learn and from whom you learn it you may become f!ed up for the rest of your life. good thing i self diagnosed myself that i was f!ed up and did something about it.
 
I agree with you 4DTrader and as I mentioned in one of my entries in the 2007 journal...
Quote from datamerc:

Just a single profitable trade that is done outside of the boundaries of a person's strategy is a dangerous thing. It is almost intoxicating because it makes you feel above your own methods, smarter than your own system. That misconception is so overwhelming - I could see the train wreck coming, but was not strong enough to get out of the way.
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My take on why traders fail, based on personal experience of virtual blowup in 2002/2003 (account got cut 90%) -

1) The need to be right went far beyond the need to make money.

2) No actual statistics taken but I'm pretty sure that traders who blew up have a significantly higher percentage of winning trades than losing trades with each losing trades growing larger and larger towards "the end".

3) When market goes against him/her, the first thought is "market is being manipulated" instead of "get the F* out"
 
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