I was asked over lunch on Sunday what I thought were the major elements that prevent traders from being profitable – so I dug out this old list.
Undercapitalised
One of the most significant reasons traders fail in the markets is that they begin with insufficient capital. Many newcomers to trading, often fuelled by overconfidence or unrealistic expectations, enter the market with far too little equity. I’ve personally encountered traders at seminars who, despite having as little as $10,000 in capital, believe they can make $1,500 each trading session. This represents an unrealistic expectation of returns, and unfortunately, it’s a common mindset.
The reality is that most traders are undercapitalized from the outset. This means that traders do not have the necessary buffer to weather inevitable losses or market fluctuations. When an account is too small, even a relatively modest drawdown—losing 10% or 20% of the account—can wipe out the account balance.
This issue is especially critical in derivative markets such as futures. For example, research and market evidence suggests that trading balances under $50,000 are unlikely to survive long-term in futures trading due to the volatility and leverage involved. Despite these facts, many traders still flock to high-risk instruments with account balances well under $10,000. This pattern of undercapitalization leads to the rapid erosion of capital, especially in volatile market conditions.
In many ways, trading is no different than running any small business. As a trader, you are the principal of your firm, and you need sufficient capital to support your business—without it, you’re operating on shaky ground. Small businesses often fail because they lack the necessary resources to weather downturns or scale up operations. The same applies to trading: without adequate capital, you will survive the ups and downs of the market.
Reliance on External Sources
Another critical mistake traders make is relying too heavily on external sources for trading decisions. While these professionals may have expertise in certain areas, if they truly knew how to make consistent gains in the markets, they would likely be focused on trading their capital, not advising others.
In the complex derivatives markets, the failure level is extremely high, with statistics showing that as many as 9 out of 10 traders will struggle. Given this high level of failure, the chances of finding an adviser who consistently outperforms the market are slim. Traders who follow the advice of others without fully understanding the reasoning behind those recommendations are putting themselves at great risk.
Traders need to understand that there is no magic formula or secret strategy that guarantees riches. Relying on external sources to tell you what to do is a dangerous path. Instead, successful traders take the time to educate themselves, develop their strategies, and take personal responsibility for their actions.
Lack of a Trading Plan
One of the fundamental mistakes that traders make is entering the market without a well-thought-out plan. In the world of trading, the exchange doesn’t tell you how to trade, nor does the market provide any formal instruction. There are no specific rules on how to structure your trades or manage your risk, beyond basic business regulations. This lack of structure can lead to confusion and inconsistency.
A comprehensive trading plan is essential. It provides clarity, direction, and a roadmap for how to approach the market. Without a plan, traders are essentially adrift, reacting impulsively to market movements rather than executing a disciplined strategy. The plan should include clear rules for entering and exiting positions, risk management strategies, and guidelines for evaluating how your trading business is performing. Trading without a plan is akin to running a business without a business plan—without it, the chances of survival are minimal.
Deviating from the Plan
Even when traders do have a plan, it’s often poorly executed or applied inconsistently. A common issue is that traders approach the plan with a lack of discipline or commitment. They might follow the plan when things are going well, but when the market moves against them, they deviate from their rules.
This inconsistent application of a trading plan is a recipe for disaster. Successful trading requires the ability to follow your plan, even when emotions are high or when things aren’t going as expected. A plan is effective if it is executed with consistency and discipline. Deviating from it, even for a brief moment, can lead to significant losses and missed opportunities.
Inability to take Losses
One of the most difficult aspects of trading is learning to accept losses. It’s natural for any trader to dislike losing, but the reality is that losses are an inevitable part of the process. The key is to cut your losses early and allow your winners to run. As the old saying goes. A big loss starts as a small loss
Many traders defer taking losses because they are afraid of admitting they were wrong. They hold onto losing positions in the hope that the market will turn around, most of the time they end up watching their losses grow. This “hope strategy” often leads to catastrophic results.
Successful traders have learned to accept that losses are a part of the game and that cutting losses early is critical to long-term survival. The ability to take a small loss the moment it is obvious that a trade has gone wrong can prevent a much larger loss tomorrow.
Cutting Profits Too Soon
While avoiding losses is critical, another common mistake is cutting gains too early. Traders often get nervous when they see a position moving in their favour, and they exit the trade prematurely, fearing the market might reverse. While this can sometimes be a wise decision, over time, cutting positions too early can lead to missed opportunities for larger gains.
The key to profitable trading is learning to balance risk and reward. Just as you need to let your losers go when they reach a certain level, you also need to let your winners run and capture the full potential of a trade. If you consistently exit trades too early, you’ll find that your gains are often smaller than they could have been, which can make it difficult to stay profitable in the long run.
Misunderstanding How Markets Operate
Many novice traders enter the market without understanding how the markets work. They may have a general idea of buying low and selling high but lack the knowledge of market mechanics and the intricacies of placing orders. Basic terminology, such as the difference between market orders and limit orders, or understanding concepts like “slippage” and “spread,” can be confusing for beginners.
Without a solid understanding of how markets operate, traders are prone to making avoidable mistakes, like failing to account for things such as brokerage or interest on a CFD transaction. Additionally, novice traders are often swayed by conspiracy theories or simplistic explanations of market movements, such as “the market is rigged” or “the banks control everything.” These misunderstandings simply serve to deepen the frustration and confusion that many traders feel.
To succeed, traders must take the time to learn the fundamentals of the markets, including how orders are executed, what causes trends to begin and end and how to interpret various market signals. Without this knowledge, it’s nearly impossible to make informed, strategic decisions.
Lacking Confidence
Trading is a mentally challenging profession, and it requires a strong sense of confidence and emotional resilience. There will inevitably be moments when things don’t go as planned—positions go against you, or the market behaves unpredictably. However, the key to survival is not letting these setbacks undermine your confidence.
A lack of confidence can lead to indecision or knee-jerk reactions, like prematurely exiting a position or failing to move when the market presents a trade. Traders who lack confidence may second-guess themselves constantly, leading to hesitation or missed trades.
On the other hand, overconfidence can also be dangerous. Believing you know everything or that you’re invincible after a few successful trades can lead to excessive risk-taking and eventual downfall.
Successful traders strike a balance between confidence and humility, acknowledging their mistakes, learning from them, and moving forward with conviction. Trading requires a mental toughness that allows you to stay focused and disciplined, even in the face of uncertainty.
