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3 Reasons Most Traders Fail
02/03/2012 2:30 pm EST
Insufficient education, a flawed trading plan, and poor risk management are the three primary barriers that cause most traders to fail, explains market veteran Bob Christy.
All traders want to reach consistency as fast as possible, but there are some mistakes along the way you want to avoid. Our guest today is Bob Christy to talk about why traders fail and what we can do to avoid that.
Bob, first of all, what’s the main reason why traders fail in this business?
I think there are three primary reasons they fail. The first is that they jump in with both feet too fast without getting the proper education.
Education is first and foremost because you have to learn, 1) who you are, and then you have to match who you are to what you’re going to trade because each investment has its own personality, just like each investor has their own personality.
See related: What’s the Perfect Market for You?
The second reason is that they don’t have a trading plan. I’m a professional trader; I have a plan. I have a plan to get in the market, I have a plan to get out of the market, and typically, the people who I’m trading against are trading as a hobby, and the hobbyist really doesn’t have a chance against somebody who is in the market full time for a living.
The third thing is risk management. Risk management is the most important facet of investing. It’s the one that virtually all investors don’t care about or don’t even really think about.
They think about the profits. I don’t concern myself with the profits; I concern myself with the losses, because if I lose my trading capital, that means I’m out of the game, so I spend the majority of my time worrying about how I’m going to lose money, why I’m losing money, those kind of things.
The profits take care of themselves, and the amateur trader is in there to make as much as he can as fast as he can, and they only focus on the profits. You have to get your ego out of the game. You have to focus on the bad stuff in order for the good stuff to happen.
See related: Tough Talk About Risk Management
So, is it a matter of just putting my stops in where I can handle the risk of that loss and then sticking to it? Is it that simple, or is there more to that risk management part of it?
Well, you have to put the stops in the right place. I have a time stop, and so if the trade is not working in my favor after a certain amount of time, I get out because there is a high probability I’m wrong. I have a hard stop initially, and that’s the maximum amount of money that I can lose on that particular trade.
What happens with most amateurs is that one, time is not a consideration. Second is that they either don’t have a stop, or worse, they move the stop whenever the price is getting close to the stop and they take a small loss and turn it into a big loss.
With that time stop, why not wait? Why not wait to see what’s going to happen? What’s the concern there?
The concern is primarily that my analysis might be wrong. You know, the market is moving because of a lot of different reasons, and if I thought it was going to do X and it’s doing Y, I need to pull the plug and re-assess.
So the time stop should be one thing that people put in. In addition to the hard stop of price, they should say “If this is not working out within four hours, four days, whatever amount,” get out?
Is that because you need the capital to find another opportunity, or you don’t want to let it just stagnate in a range for a while?
Well one, I don’t want it to stagnate, but remember, the only thing that has us in the game is our trading capital. If it’s tied up or if it’s in a losing situation, we need to pull the plug because another, better opportunity will come along.
Finally, what is one thing that you did in your trading education or your career that really took your trading to the next level; one thing you changed or did or read that really made a difference for you?
The thing that I did was I had some people do a study on my trading, and they found out two things empirically. One, I pulled the trigger too quickly. I got out of things before I realized the full profit potential, and so that was the first thing.
The second thing was that in terms of the times of the trades, since I trade currencies, we found that I lost money about 80% of the time if I initiated a trade after 12 o’clock eastern time, and so we eliminated that right away.
Then, on the stops, we adjusted the kind of stops that I use, and so I use a three-stop process. I have a profit target (level one), and a profit target (level two). At that point, I bring the stop to just a little above break even and then I let the market take me out of the final third of the position. That puts me in a position to really maximize my profit.