Recently, a new trader asked me: “What’s the biggest mistake amateur traders make?”
I paused and thought for a moment.
While amateur traders often make mistakes, I’ve never had to consider what the BIGGEST mistake was.
“Is it poor money management?” he continued.
I thought for a bit longer. That was a simple question, but the answer wasn’t so simple.
“Money management is a factor…” I replied, “but the real reason why amateur traders fail, goes beyond that.”
Why Most Traders Fail Before They Even Begin
The biggest reason why retail traders fail is not because of poor money management, lack of discipline, or even a lousy trading method.
These are important factors, but they are not the biggest reason.
So what is it then?
Put simply, the biggest reason people fail at trading is because they get into it without a plan.
Planning For Success
Someone once said, “failing to plan, is planning to fail”.
For many retail traders, having a “plan” involves something like this:
- Apply technical indicators / chart patterns
This is basically their “plan” for success.
Unfortunately for them, this is not a real plan at all… it’s not even close.
The problem here is they have mistaken tactics for strategy.
Amateur traders are rich in the former, and poor in the latter.
Planning For Success
Planning for success as a trader involves the bigger picture of retail trading.
It involves factors that are outside of the trading chart: Your broker, competitors, operating environment, trading philosophy, availability of time, etc.
By understanding these environmental factors (i.e. the context), you are in a much better position to choose how to be trading (i.e. the content), so you have the highest probability of success.
A good place to start would be to borrow a popular business acronym, SWOT.
SWOT stands for:
- What are your personal strengths? What are you often praised for? Are you a strategic thinker? Do fast-changing environments bring out the best in you? Are you always full of ideas?
- What are your strengths as a retail trader, compared to professional traders?
- Use your strengths to your advantage.
- What are you bad at? Do small details frustrate you? Do you often crack under pressure? Can you only trade at a particular time of day?
- What are retail traders weak at, compared to professional traders?
- Avoid trading methods that require you to engage with the areas you’re weak in. Focus on your areas of strength.
- Are there opportunities in the market that are easy for retail traders to exploit?
- Are there opportunities that only you can exploit?
- Based on your strengths and weaknesses, what opportunities in the market should you be looking for?
- How often do these opportunities show up? For how long are they available for you to capitalize on them?
- What could cause your plan to fail? Government regulation changes? Lack of time? Unsupportive friends and family?
- What can you do about these threats? Can you prepare for them? Can you respond well to them? Can you handle the worst-case scenario?
- How do you determine whether your trading method is effective?
- What if your trading method is not profitable? Would you adjust it, or just use a different method? What adjustments can be made? What new trading method should you be looking at instead?
These are some questions to get you started on your plan for success.
The more questions you come up with (and answer), the better your plan will be.
And the best way to do this, is to study the retail trading environment and figure out how to exploit it according to your personal characteristics and circumstances.
Many Ways To Slice An Orange
Of course, you don’t have to use SWOT analysis to come up with your plan for success. That’s not the point of this post.
Use any conceptual tool or process that you feel is appropriate.
The important thing here is to set aside your technical indicators and start creating your plan for success.
Excitement Isn’t Profitable
As with most effective actions in life, planning isn’t exciting, fast, or sexy.
Few people like to sit down and think. Most just want to “click and profit”.
It should thus come as no surprise that few traders are profitable in the long run, while most burn out and quit.