Insights from Failed Traders

The end of failed trading is seen as the end of the road. The account gets blown-out, the confidence is destroyed, and more often than not the trader walks away  thinking that the market is impossible to beat. The reality is, there is always a lesson for the failed trader to learn which is worth more than any winning streak. Ultimately, failure does not have to be final. Failure can be the best educator.

The Overconfidence Pitfall

Many traders start out with a bang by catching a few winning trades, and quickly gain confidence. Most of the time, the success is so euphoric that it causes a loss of a sense of risk management. All of a sudden, the trader is doubling their position size, discarding whips and stop-losses, constantly chasing their profits without a solid plan. The market typically does not forgive arrogance, and there will be a day of reckoning.

The lesson is clear: confidence without discipline is a liability. A few winning trades does not make you invincible. Use your early success to build your confidence, then learn to treat all trades as if they could be the one that is wrong… because they will be.

The Get Rich Quick Affliction

One of the recurring stories of failed traders is the expected outcome of getting rich quickly. Specifically, they approached trading as the shortcut to financial freedom. The problem is, there is no financial freedom pill. Chasing quick riches generally ends with an empty trading account. 

Consider the individual who puts all of their savings into a high-leverage trade with the hope of a life-changing win. More often that not, within a few days their account becomes a zero. The market will reward patience but not desperation. The take away: stay focused on steady, realistic growth. Don't fantasize about winning the lottery - fairy-tale endings may well be the only thing you win.

Emotional Trading: The Silent Killer

Have you ever got a rush during a trade? That’s when the emotions creep in. Fear makes the trader prematurely close winners, and greed makes them hold onto losers. Some even take revenge trades after a loss as if you doubled down on an unfulfilled debt because you want to "get it back."

These emotional downwards spirals form a significant part of the reason we see accounts fail. The market doesn't care about emotions, it simply responds to supply and demand. The traders that survive are the ones who can eliminate the emotion from the execution. They treat trading like a business, not a casino!

Risk Management is Just Ignored

At the top of the list of reasons given by failed traders as to why they failed is risk management. Ignoring risk is like being in a car with no brakes. It doesn't matter how good you are as an analyst - if you fail to stick to a risk management plan, you won't last.

Below is a simple table to summarize what happens to risk-aware traders and careless traders -

Take away -

it is easier to find another trade to make a profit than it is to find new capital! Without capital there is no trading!

Overtrading/ Burnout

Many traders don't fail because of bad strategies, they fail because of overtrading! Traders that sits in front of charts all day simply clicking buy and sell more often than not end in sheer exhaustion, so other trading decisions seem poor decisions. Rather than waiting for quality setups, they join the latest small price movement.

A failed trader would once reply to the question of their trading history by saying "death by a thousand trades." Each loss felt small, but cumulatively, their account suffered. The moral here is to be picky. One good trade, is worth more than ten average ones, even if they were not bad trades.

Ignoring The Learning Curve

Another reason traders quit is not going to school. They enter the real markets with real money before knowing what is going on. When losses do occur, they blame the market instead of admitting they didn't have adequate preparation.

Trading requires a serious amount of studying, practice, and patience. Traders who don't succeed often devalue the time it takes to develop skill. The moral is simple: treat trading like a profession. You wouldn't go into medicine or engineering without years of training - and neither should you as a trader. 

Learning From the Mistakes

The good thing is that failing can be a prerequisite to success. Many successful traders were once failed traders who blew their accounts, made every mistake possible (including hard trading) and came back. The biggest difference is they actually considered the lessons. 

To use a quick analogy: when you think about mistakes like tuition (for learning market education), every mistake is part of progress.

Final Thoughts

You should understand that failed traders are not failures, they are cautionary tales. Their mistakes will expose consequences of impatience, emotion and bad discipline. If you are starting out, their lessons can save you lots of time and thousands of dollars.

So before your next trade ask yourself: am I repeating the failed trader's mistakes, or, I am learning from them?

If you'd like to learn more about strategies, risk management techniques, trader psychology, visit the learn section on Wiki-lix, it's a way to take hard-learned lessons and progress as a trader.