Why Traders fail to succeed
By R. Nelson Molina, MD. August 20, 2014
It has caught my attention as to why some traders fail to make money when they follow my ideas, if I am making money, it should be simple, no? (I make money you make money). I started sharing my ideas on social media since 2010; I started on Market Watch on AAPLTraders and now on Facebook and twitter. It’s amazing how much I have learned from the different types of trader personalities, how they react to winners and how they react to losers. Yes “losers” because I too get bad trades but not enough to damage my account. So why is it that some traders fail to make money and succeed? Here are the top 5 main reasons why some traders fail to manage loser trades and fail to succeed on McBillion.
1. Having a small or under capitalized account.
Larry Hite, in Jack Schwager's Market Wizards (1989), mentions two lessons learned from a friend:
1. Never bet your lifestyle -- never risk a large chunk of your capital on single trade.
2. Always know what the worst possible outcome is.
Mr. Hite goes on describe his 1 percent rule which he applies to a wide range of markets. This has since been adapted by short-term traders as the 2 percent rule, I personally use the 2% rule on all my trades but if a trader has a small account it is hard to use the 2% rule, why?
Well for example if a trader make 50K a year on his regular job, his weekly pay check will be around $900 to $700 depending on his bracket, if this trader has a $10.000 account the Maximum Number of Shares is then calculated by dividing your maximum permissible risk by the risk per share, so lets apply the 2% rule on a trading capital account of $10,000
Trading capital is $10,000 and your brokerage costs are fixed at $20 per trade.
1. Your Capital at Risk is: $10,000 * 2 percent = $200 per trade.
2. Deduct brokerage, on the buy and sell, and your Maximum Permissible Risk is: $200 - (2 * $20) = $160
3. Calculate your Risk per Share: If a stock is priced at $10.00 and you want to place a stop-loss at $9.50, then your risk is 50 cents per share. Add slippage of say 25 cents and your Risk per Share increases to 75 cents per share.
The Maximum Number of Shares that you can buy is therefore: $160 / $0.75 = 120 shares (at a cost of $1200)
If the trade is a success and shares raised 20% the 120 shares will be worth $1440 for a gain of $240 now here is the tricky part. I know for a fact that a trader that makes on his regular pay checks an average of $900 to $700 a week this gain of $240 will be nothing or it wont satisfied his expectation especially now that we have all social media invaded by fake traders promising millions from a 5 to 10K accounts.
Now I haven’t mentioned what it's a good or a proper account to trade, to me it depends on your expectations after proper use of a risk management system.
2. Putting all your capital in one single trade
Let's forget about the most important part of trading, risk management. Traders that don’t use risk management lose money both ways meaning when they enter a good trade by closing too soon or by closing a loser trade too late. Let's use the same example on a trader with a 10K account who enters a trade with $5.000 or 50% of his capital, as soon as the trade is up 20% or $1000 He will close the position without following the plan because of the fear of losing profits. Now, if the trade go down 20% or -$1000 triggering a stop loss he wont close the trade because he is down 1K and waits to see if he gets back to even later. This USUALLY ends in a big loss since a trade that triggers a stop loss is low probability that it comes back to even. From my experience only 15% of them reverse after breaking a stop loss; keep in mind that I trade breakouts and breakdowns.
So this combination of closing too soon a winner and too late a loser is a terrible mix that will end with a total loss of capital.
From all these years sharing trading ideas I have found personalities that are very negative, ones a trade triggers an entry this type of traders will look for anything that makes the trade a bad trade usually they look for articles, social media post and or will call someone for a second opinion usually a bad one, because they are negative as soon as the trade goes up they close it or if it goes down will do the same, not letting the trade work or not following stops, another bad combination that will burn his account little by little and will make his broker rich.
Impatience is the mother of mistakes and the father of irritation. We all know this but trading and watching a trade on your portfolio that is not moving while the whole market is on rally mode is a weird feeling of missing to make money, 40% of private messages I received daily from traders are “ should we close this position it's not moving”, “ do you still on this one it's not moving” “ I am closing this trade it's not moving” and what happens later is the trade moves and they missed a nice trade. I wish all trades I entered would work immediately but usually only 30% of them (even with high ADX) move right away, the rest of them will move slow or will try to take you out by moving sideways after a breakout.
5. Trading with money you cannot afford to lose
There is no money you can afford to lose not even if it was a gift from your parents; nobody likes to lose money especially in the evil stock market. But it’s even worse when you are trading capital that was intended for buying a house, paying your medical bills, vacation money, your children’s tuition and believe me I have heard a lot of these. One time a trader messaged me saying “my wife doesn’t know I am trading with our savings and I put everything on your last Apple trade, I am down should I close the trade?” I told this trader, you will lose all of your money if not on this trade probably later on another trade, and recommended to take his wife to a nice casino and gamble their savings, probably his wife will not agree but if She agrees they would both have a nice time losing their money.
When traders use money that is allocated for other things they will get nervous, impatient, negative, and will not follow the trading plan.
If you want to succeed use risk management, be patient, be positive and only risk capital that you can afford to lose and will not have an impact on your life style, your marriage or your children.