The Major Reason Most Traders Fail

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Causes of Trader Failure. As a trading coach for over a decade, I’ve noticed that traders often start out with a streak of ‘beginner’s luck,’ but eventually the risks catch up with them.luck

At some point, many traders experience the Reverse Midas Touch, when one simply can’t win. One very smart client, a software programmer, told me that he did not have a single winning trade for two months. A perfect reverse record.

Still, to think of this as “self-sabotage” is unhelpful, demoralizing and just plain wrong. 99% of traders do not have a deep-seated desire to remain stuck or fail. That is just bad psychological theory. Something much less sinister, but equally elusive, is happening.

TOXIC STRESS – One of the Causes of Trader Failure

imagesSimply put, trading stresses us out. Stress leads to a cluster of natural defensive reactions that bias us to avoid precisely those risky situations that actually present the greatest possibility for monetary reward, and to seek out seemingly safe situations that actually offer the least chance of gain.

That is why trading to avoid risk (trading not to lose) produces diminishing returns… or worse. Risk can be managed and mitigated, but there can be no reward in trading without risk.

When caught in the Cycle of Toxic Stress, a trader gets out of sync and just about everything one does is wrong. You know you are caught in the Cycle of Toxic Stress when:

  • You hesitate to enter when and where your plan calls for an entry;
  • You impulsively chase trades, causing you to buy high and sell low;
  • You get out of trades too early, instead of letting winners run;
  • You let winners turn into losers and you hold the losers too long;
  • Your emotions get the better of you at the worst possible times;
  • You try to follow a plan, but in actual trading you act impulsively or freeze;
  • Your trading takes on a desperate quality as you try make back losses.

Stress is the over-arching issue, but it is exacerbated by seven factors that contribute to the Cycle of Toxic Stress. One cause of toxic stress is Aversive Conditioning, which means a history of bad experiences. head_maze_md

Eliminating Causes of Trader Failure

How? The most important thing is determining which issue is causing the behavioral problem. Accurate diagnosis is the key. Most traders try to self-correct without understanding the underlying drivers of trader “misbehavior.”

Until next time,

Kenneth Reid

Dr. Kenneth Reid holds a Ph.D. in Clinical Psychology. He is currently a trading coach and has published articles for Forbes, SmartMoney, and SFO Magazine. He has also appeared on CNBC and writes a column on The Trading Psychology for Trader Planet. Kenneth Specialized in trading stock and futures and is working on a futures trading book.