The Real Reasons Most Traders Lose Money Day Trading Or Swing Trading

There are personal and psychological reasons most traders lose money, but there are also systematic ones. Not everyone can win, so traders without refined processes and mental strength will become the ones that lose.

Most people who attempt trading indeed lose money. When I worked at a proprietary trading firm people were regularly brought in for training, provided with capital to trade, and on the whole 96% of them washed out, usually within several months. The profitable traders easily made up for all the losses of this much bigger losing group.

European brokers have to report how many of their clients lose money. So you will often see a caption on their website like: “73% of traders lose money with this broker.” These stats are meant to show that trading is difficult, but the statistic is low and inaccurate. This percentage is how many active accounts are losing money. It does not reflect accounts that are closed because the trader lost everything. Or, those who lost money, became dejected and withdrew their remaining balance.

If the brokers disclosed this the percentage would move up drastically. If they, for example, had to report how many accounts were opened in the last 5 years, and how many of those are/were unprofitable, I would estimate the numbers move up to that 95% failure rate region.

Real Reasons Traders Lose Money

There are a number of reasons traders lose money. Here’s the list, broken down into sections: systematic, research/practice, trading-related, and psychological.

For a quicker read of this lengthy article, read the bolded sections. Read the bullet points for further explanation.

Systematic Reasons Most Traders Lose Money

Trading, like a sport, is a hierarchy. There are a few traders who make loads of money at the top, then there are people who make a lot, then people who make a living, people who make a little, people who breakeven, people who lose, people who lose a lot, and people who lose everything.

To be profitable, you need to climb above and be better than those breaking even. How high you climb is up to you. But because it is a hierarchy, not everyone can win. You need to be better than most traders out there, on average, to make money.

  • Think of trading like golf (or any sport), and being able to make money at it. Millions of people play golf, but only a few thousand, male and female, make good money playing on major tours around the world in any given year. Only a small subset of this make the really big money. Then there are many thousands who make a living playing on smaller tours, being pros at local golf clubs and driving ranges, and doing trick shots or long drive competitions. Then you have a bunch of part-time golfers who are really good and make some money off their friends and/or win scholarships.

    Then there are millions of others who just golf, and they range from horrible to good…but the golfers above are higher on the food chain.

    Trading works the same way. To make money at it, we need to work our way up the ladder. We need to better than most people out there…and we need to stay there. Sometimes we are brilliant on one trade, and make money, but unless we stay better, we start losing again. Golfers who were good, but are no longer good, don’t get to keep playing at the top level. We have to perform to stay there.

    Trading is the same way. We need to work our way up, be better than others in order to make money, and then we need to maintain that. If others get better on average, we need to get better as well, or we will lose ground. Successful trading is not a destination where we get to relax once we get there. We have to continually practice and train ourselves to maintain that level. If we start lacking discipline or patience or focus, others will overtake and push us down the food chain—we make less money or start losing. Just like any sport, we aren’t going to consistently make money at trading unless we are better than most of the people we are playing against.

Most traders will lose or make very little, in order to “pay” the profitable traders.

  • If a professional trader made $1 million last year, potentially thousands of small traders lost money or gave up profits to feed the pro’s profits. Other pros contributed to the gain as well, but on the whole, the other pros made more than they lost too.

    Think of a poker tournament with thousands of people. Most players will win some hands, and even the pros may lose a pot to a weak player every now again, but on the whole, the money slowly shifts to the stronger players. The money the strong players make has to come from somewhere, and it comes from weaker players. Weaker players will continue to give money to the stronger players in tournaments, until on the whole, the weaker player eventually (if ever) becomes better than most, and starts making more than they buy-in for.

    Trading is the same thing. Every trade we take provides an opportunity for ourselves and someone else. Poor decisions over many trades mean our money goes to people making better decisions (better strategies, better execution, etc). Good decisions mean more money flows to us because we took advantage of the opportunities other traders provided us with their trades/orders.

Profits are created when someone else loses money OR gives up profit. This means that you need to be better, on average, than other market participants, as discussed in the hierarchy above.

  • If you buy shares and make money, someone else sold you their shares allowing you to profit…they gave up that money to you. Without someone sacrificing those shares you never get the chance to profit. On the exit, you need someone to be there to sell to. Maybe you allow them to profit, or maybe you hand them a steaming bag of crap and they lose. Either way, on the way in and out, someone allowed you to profit or lose. And you allow others to profit or lose with your transactions. The person who does this better, over many trades, is profitable. The person on the losing side of more of these exchanges loses.
  • Not everyone can win. When you buy, others need to come in after you and be willing to pay higher prices for you to profit. This plays out on all time frames. If you buy and no one comes in after or the sellers are stronger and are willing to sell at lower prices, the price moves against you and you face a loss. Prices don’t move on their own. Buyers and sellers (individuals) push prices, creating losses and profits for those involved, and opportunities to win or lose for those about to get involved. For traders to profit they need to be better at capitalizing on those opportunities than others.
  • Pros regularly have losses, just like losing traders, but on average pros make better decisions. The pro held a little longer, squeezing out more profit, not allowing another trader into the position (had the pro sold, someone else would have had the opportunity to profit). Or the pro sold quickly, cut their loss, and handed off a weak trade to someone else. The pro grabs the last few shares as the price starts rising out of a pullback (on average, if that’s their strategy). Anyone buying after them gets in at a worse price and has slightly less profit potential. Since there are pros with all types of strategies for whatever the price does, there are pros everywhere beating less-experienced traders to the punch in terms of getting shares when things look good and using less experienced trader’s orders to get out when the tides turn.
    • I have heard the argument “But what about a highly liquid stock or forex pair? I can get in or out whenever I please. So how can anyone else beat me to the punch?” Correct, there are shares for maybe one or a few people at each price level (depending on how big of a trader they are), but there are thousands of people trading at any given moment. If your strategy tells you to get in at a specific price, there are only so many shares near that level. If you buy all of them, others can’t get in at the same price (at least not at that exact second). If many people wanted in at that level, only the fastest gets the shares (could be an order placed in advance…doesn’t mean you have to sit in front of your computer), and everyone else is left out.

      When you exit, you exit on the shares available. But if everyone wants out at once, the fastest traders get out first. Or better yet, the pros likely saw the danger and sold before the panic. As the selling continues the price drops and those that are slower to react get lower and lower prices. No matter the instrument, and no matter how much liquidity there is, it is always still about who makes better decisions, and who gets shares/contracts/lots at better prices for both buying selling. You have to be better than others at doing it.
    • The chart example shows this below. A massive amount of buyers created a price spike and allowed loads of prior buyers to sell and exit their position. The buyers allowed potentially big profits for the sellers. Had the buyers not stepped in, the price would not have risen and there would be no profit for anyone trying to sell. The buyers created a profit opportunity for the sellers. This is a simplified explanation, but there is a clear wealth transfer that occurs. Every transaction is an example of this. Over many trades, the results show who made better decisions.

      Also, consider that there were limited shares at each level as the price started to rise. Those that acted quickest got better prices. Those that reacted later bought at higher and higher prices, with reduced profit potential. Eventually, someone bought right at the top (and someone sold to them)…and no one followed them in. The race then starts the other way. Once the buyers started disappearing, people started selling (at lower prices to find willing buyers). The quickest sellers got out near the highs, and those that are slower got out lower and lower. NOT EVERYONE CAN SELL AT THE TOP. Those that got in earlier than most, and out earlier than most, fairly ok. Those that weren’t as quick lost money. Over many trades, this creates the hierarchy.
    • This chart also emphasizes the point that profits are only made if others follow you in. For the early buyers, they had followers. The higher the price went, fewer and fewer buyers followed them in. Eventually, sellers overwhelmed the buying interest, and the buyers backed off. They were willing to buy at lower prices, but no longer at higher prices.
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Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using ...

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