Before the TradeJun 11 • Categorized as Trading
“You would be amazed at how many traders say they are motivated; when what they really mean is that they would dearly love to be successful.”
Brett N. Steenbarger, Ph.D.
Popular Trading Statistic: 95% of Traders Fail
Is this statement accurate? Where does the statistical data come from? Is there a registry of “traders” where records are kept from first trade to last? What if a trader stops trading after a year? His account is slightly profitable, but he has decided that he cannot make enough money and trading is not for him? Has he failed since he is no longer a “trader” or has he succeeded because he made money? What if his account is breakeven?
I take issue with the above statement, not in the actual statistic, but in the use of the word “trader”. What makes a trader? Is it simply deciding to put on trade or two…or ten…or twenty? If I place a bet on the Chelsea/Manchester United match or the Yankees/Red Sox game, either with friend or at a casino sports book, am I a gambler? If I disinfect a cut and dress it with a bandage, am I a medical professional? The conclusion I’ve drawn is it’s a question of word choice. Simply semantics. The statement should read, “95% of people that attempt to make money through retail trading, lose money net/net and give up on trading entirely.”
On the surface, these may seem like virtually identical statements other than the word count, but the difference is both subtle and colossal at the same time. The goal of most people when they begin trading is wrong. Their goal is to make money. The goal should be to become a trader. I’m often asked, “Don’t traders make money?” Yes, over large sets of time, traders make money. Some more than others and some over shorter sample sets, but like most professions, if you do not achieve the goal of the profession with a certain consistency then you are forced out of that profession by financial failure. A doctor with too many malpractice lawsuits will not be a doctor for very long. A restaurant owner with bad food will see his restaurant close, etc.
The perceived ease of entry into the world of trading, Step 1-Open an Account Step 2-Start Trading, seems to have given people the impression that becoming a trader is just as easy. It is not.
The least important action in becoming a trader is the opening of a trading account. The most important actions happen before the trade. Not only what happens before the first trade, but before every subsequent trade that you make in your new “career.” The development of a trader’s mindset is elusive and critical. When you decide to attempt trading, you have embarked on a path where loss is unavoidable. There are zero 100% profitable traders. They just don’t exist. Trading is not about avoiding loss, because it’s not possible. The trader’s mindset involves managing, and more importantly accepting, risk. A trader chooses high probability trading methods and places every trade presented by the method. A “risk per trade” level is decided upon on a monetary basis. This means that a specific percentage of the overall capital being traded is chosen based on an individual’s specific financial situation and that is all that is risked on a given trade. No more. My number one trading rule is “never increase risk, only reduce it.”
When most individuals embark on a journey of trying to become a trader, they think about how much money they can, should, or need to make. This is why the 95% of them fail. The pain and stress of loss makes them question their research and makes them afraid to take the next trade. 5% of us think about trading from a perspective of risk and just let the profits come out as a result of a proper trader mindset. This 5%, once they’ve fully learned whatever high probability method they’ve decided to use, never fear the next trade. To them, loss is a part of the business. It is the pain that is part and parcel to the gain. If you want to be one of the 5%, you cannot go into it thinking like the herd. Trader logic is not intuitive. It is learned. Prepare your mind to accept risk and loss before the trade begins and join the realm of the 5%.
Would you like to learn more about this and other indicators in a variety of financial markets? Tres Knippa and I are hosting a live educational seminar on August 5th and 6th, 2011 in Chicago, IL. My focus will be on the S&P 500 futures, commodities, and a unique opportunity I see in the Japanese Bond market. Bob’s focus will be proper trader mindset along with 2 of his core trading strategies that could use in a variety of markets. We will also be interviewing Mark Douglas, author of “Trading in the Zone” and “The Disciplined Trader”.
By Bob Iaccino
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