Why Traders Fail

I've previously blogged about the Risk of Ruin and why so many new traders go broke before having a chance to learn much about the business. 

It's not always about going broke.  Many traders try to make money for a long period of time before giving up.  It's not easy to become a profitable trader.  In addition to learning that which must be learned, there's the perpetual problem of fighting bad habits or allowing certain personality traits to get in the way of making sound trade decisions.

Basically, there's a lot of things that can go wrong which destroy a person's chance to become a successful trader.

In a recent interview with independent trader and blogger, Mark Miniervini, Charles Kirk (The Kirk Report), Charles asked this important question, and received a very helpful answer:


Kirk:  Why do you think most traders fail?

Mark Minervini:  Here are 6 reasons:

  1. Poor selection criteria; usually based on personal opinion, theory or tips and bad advice

  2. They don’t stick to and commit to an approach; style drift

  3. Don’t cut losses (#1 mistake made by virtually all investors)

  4. Don’t know the truth about their trading – they fail to conduct in-depth post analysis

  5. Treat trading as a hobby and not a business

  6. Want too much too fast; learning a skill takes time


There's a lot of important meat in those few lines of text.  We all recognize that it's not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else.  What causes a trader to suffer a big hit?  I believe that it's the unwilligness to accept that a trade is not working, and that it's not likely to get any better if held longer.  Under those conditions, losses mount.  The only way to prevent that big loss is to cut it off at its knees – and the time to do that occurs when it's a much smaller loss.The difficulty with that is sacrificing the possibility that the trade would turn profitable.  My advice:  Get over it.  Many trades will be unprofitable.  That's a fact of life for a trader.

I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss.  However, that's also a preventable occurrence.  If the damage is too great, then the position was too large.  It really is as simple as that. 

Mark's tips above and my comments may seem simple.  That's because they are simple – and that simplicity makes people doubt their importance.

How many of us look at trades after the position is closed?  How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made?  Very few. 

A mistake is not a trade that loses money.  A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see that.  Another mistake is avoiding a trading plan and not doing postmortems on  your trades.  It all takes so much time.  However, if you take trading seriously, and do not consider it to be a hobby, there's work to be done.

Mistakes are part of the game.  Making the same mistake repeatedly is not.  At least it's not part of any successful trader's game.



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2 Responses to Why Traders Fail

  1. Dana 01/12/2011 at 10:07 AM #

    Do you have to buy sell stock when you buy sell calls and puts?
    Also, please explain in layman’s terms about exercise and assignment. I still do not understand these concepts.

  2. Mark Wolfinger 01/12/2011 at 10:24 AM #

    1) No. You may BUY or options without a stock position.
    The rules say that you may also SELL options without trading stock, but some brokers do not allow that. So you must ask your broker in that situation.
    2) You go to the supermarket to buy coffee on sale. The store is out of stock and gives you a rain check. That rain check is a call option because it gives you the RIGHT to go back to the store and buy that coffee at the sale price – before the rain check expires.
    When you do that – when you go to the store, take the coffee and hand the rain check to the cashier, you are EXERCISING YOUR RIGHT to buy the coffee at the sale price (that’s the strike price).
    The store (in the person of the cashier) has been ASSIGNED AN EXERCISE NOTICE (i.e., been informed that the option holder is exercising the contract), and is OBLIGATED to deliver the coffee at the STRIKE PRICE.
    You do not have to buy the coffee. You do not have any obligation to exercsie your option (rain check), but you have the RIGHT to do so.