The financial markets such as the currency market (Forex), futures, commodities, stocks and other offer excellent opportunities to invest our capital and make money speculating on the price of these assets. But statistics tell us that the vast majority of those who venture into the market end up losing money. In fact, it is interesting that statistically speaking it is easier to become a lawyer, engineer or doctor that a successful trader. More interesting is the fact that the success in this field has little to do with intelligence or preparation of the individual. There have been cases of smart and well prepared academically speaking people who never saw a penny in the market and instead I have known other cases of people with an intellectual and educational average level who earn tons of money constantly trading in the market.
For this reason, we will discuss in this article some of the main reasons leading to failure of most novice traders.
- Psychology: If there is a field in which psychology plays a major role is in trading. The market is quite erratic in its nature and what works for us today not necessarily is going to work tomorrow. Therefore, we are always exposed to moments of loss and gain, frustration and satisfaction. This roller coaster of emotions is difficult to handle for most and if the trader does not learn to do so is unlikely to get results. In a regular job even people with psychological imbalances can perform fairly well but the market is not the case. For example, a trader must accept at times not only losses but also be able to get away before these losses grow. A psychologically balanced trader knows how to take losses and gains as normal as he understands that both are part of the game and will always be there. He will not be dominated by the fear of losing or emotions like greed when he is winning.
- Ego: The ego can be our worst enemy in the market. As mentioned above, given the erratic nature of the market, sooner or later we’re going to make mistakes as this is inevitable. Big traders, who earn millions of dollars in the market, sometimes are also wrong, but unlike the others they can recognize when they are wrong and take corrective actions. In short, they have no ego, they acknowledge their mistakes, correct them, move on and do not stop to mourn because they were wrong. The ego makes the novice traders not to accept when they are wrong and leave their losing positions open waiting for a market reverse (that in most cases never comes) which shows that they are right. And the market often moves in small, medium and long term trends in which we can lose all our capital if we do not leave when we are losing.
- Lack of education: It is surprising how many novice traders are manipulated by the advertising of certain brokers and open an account, deposit funds and begin to trade without a clear idea of what they are doing. When this happens logically the beginners ends up losing their hard earn money in a few days. If you want to trade in the market, do it, but first prepare yourself properly, read on the subject, study, seek information. Today Internet is a huge source of information on financial markets and Forex in particular. Like anything else in life, trading requires study and preparation.
- The search for the Holy Grail: In this case we can define the Holy Grail to the always sought and never founded perfect trading strategy that never fails. Many traders spend time and even money in search of a perfect system that allow them to trade in the market without ever losing and the fact is that there is no such thing. Even the best strategies sometimes fail and the trader lose money. That is inevitable. If we dedicate ourselves to find the perfect system, we are going to lose our time and money and probably fall into frustration. A system that has a winning rate of 50-60 percent it is considered quite good as long as we apply a good money management plan that allows us to maximize profits and minimize losses. Ideally, we must try to find a system that suits our personality and allow us to trade comfortably.
- The urge to make money: It may sound paradoxical, but if we begin to trade in the market thinking about just in money surely we will end up losing it. It’s that simple. At psychological level, when we begin to push ourselves to make money quickly that can lead us to make errors which the market is certainly going to collect. I once heard a very interesting comment about the topic which stated that the trader should not worry about making money but to trade well, in other words the trader should be dedicated to analyze the market, identify good opportunities to take profits, cut losses quickly, and so on. In summary, the traders should try to do their job correctly and the money will start coming quickly. For example, just imagine a doctor in the middle of a surgery thinking about the money he will earn with the operation instead of avoid cutting a major artery or damage a vital organ.
As you can see, these errors are more related to the psychology and personality of the trader, so in my opinion can be overcome through a process of self-knowledge and discipline. More information about psychology in trading through the following link: