According to statistics, more than ninety percent of all traders fail. The reasons why ten percent succeed need to be understood.
Equation to become a successful trader
Equation to turn into a successful trader is very simple.
Knowledge + Effort + Experience = Success
A consistent and profitable trader does not reach this position through mere luck. The above simple steps are followed -
- They gained knowledge
- They improved their gained knowledge through practice or experience
- Knowledge and experience needs a lot of effort
Experience level cannot be defined because for some it can be a two year to learn trade and become a pro but a few can take five years. Hard work has no substitute and no shortcuts are available to become a competent and professional trader.
Self-education needs effort and commitment. There is no need to be a whiz kid to attain consistent profits in share market. It is found that new traders have a propensity to complicate this process. This can be because of some reasons like -
- Expert share market investors suggest that trading is only for shrewd and highly educated people, so new small traders believe it to be a mysterious and complex process.
- In addition, marketing companies make statements that there is no need to have knowledge or experience. You can get rich in no time using their DVD sets or attending their seminars. Marketing companies are just filling their banks.
Equation demonstrating why traders fail
Lack of knowledge + Lack of emotion control + unrealistic expectations = failure
Lack of knowledge
Lack of knowledge is the main reason traders fail. Poor education is not the main cause because many traders who have failed gained necessary education. The real thing is that they gained education from wrong places.
Majority of traders just buy and sell stocks. When you ask them how they analyze when to buy or sell their shares then many of them claim that they -
- Read reports published in the newspaper
- Listen to news
- From websites
- Online brokers charts
A few have rough fundamental theory they use to evaluate share. Several hardly know chart interpretation. No one has a plan or understanding about money management.
On the other hand, an educated trader knows how important a trading plan is and proper use of trading tools. They focus on implementing solid money management rules like position sizing and stop loss to reduce risk and increase profits.
Majority of people enter the share market to earn profits taking high risks. Reading few trading books or attending seminars or taking few courses does not mean you are adequately equipped. Unrealistic expectations, overconfidence, and hope lead many to lose their savings.
Knowledge is the way to success but in trading application of knowledge correctly is everything. In bull market conditions, many would-be traders earn profit but it is just luck instead of good knowledge. However, the probability that they get added in the ninety percent failed trader’s category very soon increases.
Experience is crucial to achieve a successful long-term goal. For example, you will not visit a doctor, who watched several videos and attended weekend workshops. Similarly, if you desire to make a trade career it is necessary to gain experience of 3 to 4 years like just any other profession.
Lack of emotional control
Getting educated on how to trade is easy but understanding your psychology is hard. Traders fail because of lack of knowledge and even a trader’s psychology or approach plays a role.
Trader’s emotions like fear and greed drive them to the doom zone. Without correct education, their emotions get escalated that causes costly mistakes. For example, CFD trades can be done with small margins but emotional traders with less investment money can find it challenging. They are emotionally attached as they cannot afford to lose it. Fear of losing is so strong that they exit profitable trades very early or stay long with a hope to recover the losing trade.