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
- Profit
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:
- Strengths
- Weaknesses
- Opportunities
- Threats
Strengths
- 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.
Weaknesses
- 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.
Opportunities
- 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?
Threats
- 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.
Well said Chris. It is an area I would say is overlooked by the vast majority of people starting out trading.
It would be crazy to go into any business venture without a firm, written, detailed plan of action. Trading is no different.
Hi Steve,
Agreed. Life and trading have a lot in common.
Chris
I think you write a lot of sense – some of the people who trade should take notice of what you say about being profitable. I agree that there are not many great success stories to be had out there!
In my research of amateur trader failure, number one reason is market maker broker and number two reason is traders’ assumptions about the contract with the broker.
Hello Chris: I am a professional trader. Actually one of the ones from Dreamsphere trade copier where you are banking some nice passive income. First I want to thank you for continuing your live monitoring of our performance. The only thing I would add to this post is the discipline and patience to follow it. Some people create wonderful plans and then desert them the minute something goes wrong. It is like a good system that will work for one trader but not another, with the same rules and the same account size. I have seen this so many times that it staggers me. However that is why it might be wise to let those who have mastered this to trade for you. Until you master it yourself and it takes a lot of time and discipline to do it then the wiser decision might be to let someone else to do it.
Thanks again:)
Hi Marc,
Thanks for stopping by.
I’m inclined to agree with you — I’ve seen so many traders abandon their trading method/plan the moment there are drawdowns.
Personally, I’d prefer to trade for myself, but if I didn’t have the time (or inclination) for that then it’s probably a good idea to have someone reliable to do it for me.
Ciao Chris,
What you wright has always sense, I agree with you and Marc, but the point is that if you are a beginner you tend to believe in some one who can guide you, here come-in the jungle of the web…..will take time and money to reach the point that you realize that 90% of what is out there is useless and you are able to choose who you can follow.
In the end I will say that “knowledge & education” is the base and the shortcut that will build up all the other qualities of a good trader.
Hi Chris,
I learned the SWOT but unfortunately I never use it in trading….may be this is a good time to adopt that…….btw, would you share with me what is a good trading plan….,could you itemize the key steps and issues to watch for before entering the market….can the plan be adjusted or changed over time……what factors to consider before changing the plan….
thanks for helping……
Hi Rizal,
I believe what you’re referring to is a trade plan.
A trade plan is a component of your overall plan for success as a trader. There are many other factors to consider, other than the steps you take just before entering the market.
And in fact, these steps should be derived from your understanding of the retail trading industry and personal strengths and weaknesses.
If you don’t have the time or inclination to figure this out by yourself, consider learning about them in the Icarus Project.
Have to agree so much with all the above… I would say the real key(s) to “the holly” grail is to to figure out our personal profile,strengths,weaknesses and what time frames we have “sensibly’ available for trading then mix that in with all your suggestions above along with a trading method that suits that overall profile
great trading all
cheers
Hi
Your SWOT analysis succinctly explains my situaion here in Nigeria.
As a retail trader, I have the problem of time to trade, unstable
Internet connection, power outrage etc, but I do not understand how
brokers and competitors are issues!!!
Actually sticking to your strategy and allowing it to hit is a vey good idea, trading needs patience and perseverance, the only problem traders are now facing is between the market makers and brokers, they are now in charge of the market no matter your strategy…
During a gold rush, selling shovels is generally the way to make money. Same with day trading. The vendors of methods and platforms make money as vendors not traders, otherwise why don’t they just keep quiet and retire on their profits? A desire to “pass it on? Unlikely.
Couldn’t have said it better!!