If you look for statistics on successful traders online, they generally say that upwards of 90% of traders fail. Although this may not be accurate, the truth is that the majority of traders fail to make a consistent income from trading. Following are the main reasons why they fail.
Expecting easy money
Many brokers across a range of markets advertise how easy it is to start trading, which causes new traders to think that trading is an easy way to quickly make a lot of money. Yes, it is easy to trade - with online trading platforms accessible from your iPhone, Android or Blackberry handset, it's easy to open and close trades with a single click.
It is also easy to make money - everyone can benefit from a bit of luck and make a winning trade without understanding how the market works. However, it is much harder to make money consistently, and it can be just as easy to lose money as it is to make a profit if you aren't prepared.
Not having a trading plan
Your trading plan should cover both your objectives, and what you will do when problems occur.
What do you want to get out of trading? If it is something you want to try once just to have a go, then go ahead. But if you want to make consistent profits in your trading then you need to have a plan that covers what you want to achieve, whether that's an extra $1,000 spending money in the bank a month, or a nest egg for your children's education or your retirement. Knowing what you want to earn from your trading also helps you plan what to set aside, as well as what to reinvest.
Also, what will you do when things go wrong? The market may turn against you, or a power outage could prevent you from closing a trade. If you know how to react to these things in advance then you will be less likely to desperately gamble away your capital trying to quickly win your money back.
Not having a trading system
If you don't use a trading system, then you won't know what works and what doesn't because you will be constantly changing your methods. Being consistent is the best way to find out whether or not a trading system works and, if it does, being consistent will result in steady profits.
Your trading system should address your indicators for entering, adding to and closing positions, the percentage of your capital you are able to risk, how to set orders for when the market opens, and the tools you will use to educate yourself about the market (such as charts, market updates, economic news, etc.).
Once you have a system in place, keep records of your trades to monitor your success and tweak your strategy.
Not managing trading risk
Most traders just focus on potential profits, ignoring possible risks. Even the best trading systems aren't right 100% of the time, which means that even the best traders will make losses.
So how much should you risk? A common guideline is never risking more than 2% of your capital per trade. If you only risk 2% per trade, five straight losses only equate to 10% of your capital gone, and it is much easier to make back 10% of your capital than it is to make back 50% or even 90%.
Other popular forms of risk management, made easy with the advent of online trading software, are stop and limit orders. Stop losses order your trade to close if the market moves against you to a certain extent. So if you have invested in share CFDs and you place a stop loss at $0.50 below the share price when you opened the trade, even if the shares lost $1 or $2 in value, your trade would have been automatically closed when the shares lost $0.50, reducing your possible losses.
Trailing stops are another type of stop order, but they follow the market if it moves in your favour. So if you set a $0.50 trailing stop on your share CFDs, your opening stop would be $0.50 below the value of the shares. If the shares went up by $1, your trailing stop would also rise by that amount, staying $0.50 below the current share price, thus sealing in your profits in case the price falls unexpectedly.
Limit orders work like stop losses but, rather than reducing your losses, they work to protect your profits. A stop loss closes a trade when the market moves against you to a certain extent. A limit closes a trade when the market moves in your favour to a certain extent. So if you invested in share CFDs that were worth $1.50, you could place a limit order at $3. This would cause your trade to close automatically when the shares rose to $3, meaning that you would have taken your profits before a possible price drop.
Not being disciplined
Of the reasons why traders fail, discipline is the most important. Discipline is required to make consistent trading profits. It takes discipline to create a system, discipline to follow that system, discipline to keep up to date with market movements, discipline to trade regularly, and discipline to conserve your profits and to get over your losses.
Discipline is also required in cases where you shouldn't act, such as pushing out your stop-losses when the market turns against you, and then putting more and more money into a bad trade in the hope that things will turn around.
Unfortunately, the human mind seems naturally inclined to break trading rules - don't! If you have realistic expectations, put a trading plan and system in place, manage your risk, protect your profits and remain disciplined, you are well on your way to being a successful trader.
CFD trading offers a flexible way to trade the world's financial instruments, including over 7,000 global shares. Why not try a demo account from my favourite CFD provider? This will give you a good understanding of how to use the CFD trading platform.
Please keep in mind that CFDs and forex are leveraged products, so it's possible to have losses that are greater than your initial investment. As CFD trading might not be suitable for all people, so please educate yourself so you understand the risks.
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