Why do 90% of traders lose?

Trading is arguably one of the most popular ways for traders to generate income, either as a full-time career or a part-time venture. It also enables traders to participate in the financial markets while maintaining flexibility in their schedule.

However, while trading offers opportunities to increase financial wealth, the risks inherent to it raises an important question: why do so many traders lose? 

1. Traders’ Lack of Mental Resilience

One of the most challenging components of trading, regardless of approach, is the ability to maintain mental resilience. Trading can evoke the biggest range of emotions, largely because of market volatilities and the often unexpected and aggressive movement of prices, leading to large losses.

Knowing how to control these feelings, usually steeped in fear, anxiety, stress, frustration, excitement and even greed, is vital if one wants to achieve more successful financial outcomes.

Of these emotions, fear and greed have shown to be the most powerful affecting trading decisions. They often result in a trader exiting a trade too early or holding on winning trades for too long in the hopes that profitability will rise, only to see their gains disintegrate when the market moves in an adverse direction.

Additionally, experiencing loss commonly leads to revenge trading in an effort to recouping the funds that were lost. At times, this sees a trader taking on exponential risk out of desperation but this emotional approach usually results in further losses.

This increases the importance of building a robust trading psychology in order to mitigate the risk of feelings clouding judgment and leading to impulsive decisions. Developing emotional discipline and mental resilience is crucial for longevity in this domain.

2. Traders Without Sufficient Knowledge

Trading is not as easy as it would appear and a lack of education often times contributes to the failure of traders. Jumping into trading without knowing how it works means navigating complex financial markets blindly, leading to poor decision making and losses.

Without putting in the time to learn as much as you can about the markets, trading strategies, and risk management, traders are likely to make costly mistakes. Education equips traders with the knowledge and skills needed to properly handle these 3 core factors.

Access to trading insights

Gaining a trading related education is not difficult, not with the infinite number of resources available online.  Most reputable traders also offer a wide variety of trading insights in many different forms.

For instance, the IronFX Academy offers traders access to top tier courses, webinars, videos, eBooks and a useful glossry for fundamental trading related terms.

In addition, IronFX traders can also consume the broker’s podcast and webinar for informative content delivered by the broker’s expert education and research team. IronFX also provides invaluable information on trading psychology and the effect that it can have on the decisions that traders make.

Practical trading experience

Another key way to boost one’s trading skills is by signing up for a demo trading account. A demo account offers a simulated trading environment, one that mimics live market conditions, for traders to get a proper feel of what real trading will look like.

They are able to enter and exit trades using virtual funds and assess outcomes. They can learn more about technical analysis and economic indicators to make better informed decisions. Over time, the trader is likely to gain sufficient experience and confidence to start trading in live markets.

3. Neglecting to develop an effective trading plan

One of the first steps in kicking off your trading journey in a way that doesn’t see you lose 90% of your income is to develop a trading plan.

A trading plan typically provides the framework – the structure – on how you will trade. It will specify your trading objectives, the rules by which you will enter and/or exit trades, the level of risk you’re willing to incur, the budget you have, and the time you will commit to ongoing learning.

This provides a clear path to follow, helps a trader better focus, and mitigates the risk of emotional decision making. Additionally, a strategic trading plan instils confidence and can act as a benchmark to track trading performance against. This allows the trader to identify areas for improvement and make informed tweaks, where necessary.

4. Traders Failing to Adopt Risk Management Tools

For any measure of success or profitability to be achieved in trading, risk management is key. Without it, chances are you’ll lose more than 90% of your money, you may end up losing all of it.

To ensure that you are properly safeguarding your funds as best you can. There are several ways to do this:

• Avoid excessive use of leverage. While leverage can help you amplify your gains, it can just as quickly magnify your losses. Yes, leverage can be a powerful tool, allowing you to control a larger position with a smaller amount of capital, but over-leveraging in the hopes of making a big win can quickly lead to large losses.
• Failing to set stop-loss or take-profit orders. Stop-loss orders are set to limit losses, while take-profit orders seek to lock in profits. Failing to properly set either in the hope that the market will reverse can lead to exponential losses, often times unanticipated. This is why ensuring that you adopt both orders is critical to protecting your money.

5. Overtrading

We’ve touched on how being unable to regulate your emotions can lead to feelings clouding judgement, often resulting in knee-jerk trading decisions with poor financial outcomes.

However, overtrading can come about for different reasons. A trader may choose to chase the market, attempting to profit from volatilities but without proper analysis, leading to poorly timed entries and exits.

This highlights the need for proper technical analysis and monitoring of news to keep informed, and to be able to make trading decisions based on real time data.

Steps to mitigate large losses in trading

Taking into account the key points listed in this blog, what then should a trader do to avoid losing most of their capital when trading?

• Learn how to manage your feelings in way so that they don’t influence your trading decisions negatively. Working on strengthening your trading psychology, be this through minfulness practices, physical exercise to calm the mind, or simply stepping away from your screen for a quick breather. Ultimately, you want to reach a point that your financial decision making is based on sound, objective analysis instead of emotions.
• Engage in ongoing learning to ensure you stay on top of any trading related or technological developments. Don’t venture into trading until you have developed a good understanding of what trading entails. Expand your knowledge and boost your skills, so that you’re not jumping in completely blind.
• Make sure you’ve built a solid trading plan and don’t deviate from it unnecessarily. This is not to say that adjustments won’t need to be made at any point, there may be. But use the plan to maintain focus and discipline.
• Ensure you integrate effective risk management techniques into your trading strategy to protect your funds. This includes setting stop-loss and take-profit orders, being mindful of position sizing, avoid excessive use of leverage, and consider diversifying your portfolio.
• Avoid overtrading. Don’t be reactive – take decisions that are carefully thought-out and properly planned. Use data as your basis for entering and exiting trades.

Become a trader with IronFX

Becoming an IronFX trader means gaining access to a high-quality, flexible trading experience, multiple asset classes, an extensive range of account types, and fast trade execution.

Through this international broker with clients across the globe, you’ll also be able to enjoy seamless withdrawals and deposits, and market access via the MetaTrader 4 (MT4) trading platform, arguably one of the world’s most popular trading systems amongst global traders.

The IronFX Academy also offers an abundant source of educational resources to boost one’s skills and acquire fundamental trading insights.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.