The common
saying is that 90% of traders lose money in the markets. That’s not an
encouraging statistic for someone who wants to start trading, but there are
some key reasons why most traders lose and knowing them can help you to avoid
the same mistakes and increase your chances of success.
The first mistake
is to jump into the markets without knowledge. That’s like gambling and if you
don’t know what you’re doing and why, then you won’t survive for long. Just
look at how many retail traders jumped into the markets during the covid
crisis.
There are stories of lucky people changing their lives for the better
yes, but they are very rare compared to those losing all of their life savings
or worse having to pay back huge debts as they gambled with money they didn’t
have. In the chart below you can see how in just two years retail traders went
from heroes to zeros.
The second
mistake is getting the wrong education from social media influencers whose
goals are just to sell courses and trading signals. You have to be careful when
you invest in education because “an investment in knowledge pays the best
interest”, but an investment in wrong education is deadly in trading. You
better find some free resources and at least get some basic knowledge first and
then if you want to invest in some course or trading community, make sure to do
your due diligence before committing. Friendly tip: avoid anything that focuses
on technical analysis.
Once you
have some knowledge, you need capital. The rule of thumb is to invest/trade
only the money you can afford to lose. DO NOT trade money you need to pay bills
or to live off of in general. If you do that, you will already set yourself up
for failure because the psychological pressure will be so high that you will
easily make any kind of emotional mistake, from fearing of missing out to
revenge trading. Statistically, more than 50% of new businesses fail due to
undercapitalisation. Avoid this mistake and you will be another step ahead of
the majority.
Even if you
get the knowledge, skills and capital, the last thing you need to get is
experience. Real life experience can’t be taught, it’s something you acquire
through practice and mistakes. It’s the very best teacher for anything in life.
Yes, you can learn something from other people’s experience, but nothing can
substitute your own. In fact, many successful traders study the past
experiences to better forecast the future. A famous saying by Mark Twain goes
like “history doesn’t repeat itself, but it often rhymes” and that happens in
the financial markets as well. The business cycle repeats many times and the
market most of the time follows the same pattern of boom and bust.
A recent
example is how bad equities performed when the Fed in 2018 was running QT and
the global growth was slowing down. Now we are in 2022, the Fed is starting QT,
global growth is slowing down a lot and equities are in a bear market…
This article
was written by Giuseppe Dellamotta.