Why Most Traders Fail (And How to Change That)

Did you know that nearly 97% of new day traders are destined for failure? For most people getting into this industry that’s a scary number, we’re going to change that.

In this post you’re going to learn the 3 main reason why MOST new trader fail . Some of them are probably going to surprise you and be a “ah ha” moment.

More importantly I’m going to teach you a proven process that will help you avoid these serious mistakes.

Note: Source of 97% failure rate comes from the following study.


1. Misinformation

The first reason most traders fail is there’s a ton of misinformation online when it come to day trading.

Most online educators are really good at what they do, but it’s not day trading. ) They’re great at producing content and marketing, but in reality most of them don’t trade or are failed traders.

Luckily, it’s easy to cut through all the misinformation, you just have to ask your self a couple of questions. 

First, what is the background of the creator of the post/video/guide that you’re studying?

Who have they worked for?

What’s their track record?

I would like to note that’s there some professionals in our industry who don’t actually trade that play a very important role, and that’s performance psychologists and coaches. In all honesty I hold some of these individuals in the highest regard.

I began my trading career in 2003 for a proprietary equity firm in Chicago (GPC).

Schonfeld Securities was the only firm I’m aware of that was larger at that time.

At the firm I produced top 10 performances and acted as lead coach/mentor my last four years at the firm prior to leaving and trading my own personal capital. We will look at my first two years of performance shortly.

P&L Graphs Showing What New Traders Expect and Reality

2. Unrealistic Expectations

New traders trying to learn on their own online typically set unrealistic expectations.

I don’t think you would go to a bookstore today and purchase a book on open heart surgery and think that you will be performing open heart surgery next week. (at least I hope you wouldn’t) 

Yet that’s the mentality most new traders have when they get into this industry.

It’s simply a result of misinformation and the countless get rich quick schemes online when it comes to day trading.

Every corner you turn online you can find the next Lambo driving rich kid who lives an exotic life and trades all over the world. Or a program that will make money for you while you sleep! Sounds AMAZING!

Let’s set some facts straight…

DAY TRADING IS ONE OF THE MOST COMPETITIVE AND CHALLENGING INDUSTRIES IN THE WORLD

There’s millions, for some even billions, to be made in the markets. As a result there’s fierce competition and only a small percentage of the cream rises to the top.

Average does not make it in this industry. Everyday you’re competing with some of the most brilliant minds in the world.

More importantly, you’re competing against yourself and all the characteristics coded into your DNA and subconscious mind that don’t always align trading.

Is it impossible? No, not at all… but it will require sacrifices and 100% commitment on your part. Just like anything else truly rewarding in your personal and professional life.

To help set some expectations let’s take a look at my first two years of trading at GPC.

But before we do, please remember I was working for a professional firm with a track record of success. On top of that I was grinding, I’m not talking 40 hour weeks.

I had incredible support a the firm including the owners (both elite traders) as well as my trainer Brandon. Brandon, was an elite trader who’s greatest strength was his discipline. I sat next to Brandon every day and watched him trade for the first 6 months or so.

Trading Statements

My first day of live trading was July 28th and I believe I began at GPC at the end of May.

I spent a couple months going through intensive training, sim trading, as well as watching Brandon trade. The company held nightly meetings from the best traders where a ton of insight was gained and we had monthly meetings with one of the owners of the firm.

I was 100% fully consumed by trading.

I had to first prove that I could make money on a simulated account before I went live. Yet most new traders that learn online will jump to a live account prematurely.

When I began my losses were small. I was trading 100 shares max to begin and slowly over time as I proved myself the firm would increase my buying power.

The majority of my days the first few months were losing days. It really wasn’t until about 4 or 5 months in that you begin to see some consistency and profits.

Not until the end of my first year did I start producing some decent money. Throughout my second year I continued to increase my size as things really started clicking.

I may not be the best example for you as I was the youngest trainer at the firm. I excelled much faster than my peers and the class I came in with. Simply put, don’t be surprised if it takes you even longer to produce results.

Graph Displaying What A Successful New Traders P&L Will Look Like

Above is a hypothetical timeline of what a successful day trader’s P&L will look like.

It’s usually at the 6 -12 month mark that a trader who has been dedicated starts to see some consistency. At which point it simply becomes a matter of sizing up.

There will be some growing pains as you size up as well. The more patient you are the easier the process will be.

The question mark on the graph above represents a disruption in the industry that changes the game. I’ve seen two major one ones in my career that were a result of electronic trading and then later the dominance of algorithms.

Just like the floor traders, traders who primarily relied on level II for their edge, like myself, had to adapt or die as the algorithms began to dominate market volume around 2008.

Trading is a constant game of self improvement. The second you let it become anything else you’re going backwards.


3. Poor Definitions & Execution

Traders who are losing money will have poor definitions of their strategy and poor execution.

Professional day traders are experts at defining their edges. You will hear me say this often. 

A complete trading strategy is extremely descriptive and will outline:

  • Patterns/Signals you will trade
  • The context under which you will trade those patterns
  • Descriptive trade management
  • Risk management

Most new traders simply find a pattern to trade and never apply any context or management strategies which ultimately is what makes a pattern profitable.

No matter your trading experience, when you’re in a position you will lose some clarity. New traders will act like a deer in the headlights of car.

A well define strategy will lessen the impact your emotions will have on decision making. You follow a process and become much more reactionary to the data the market is providing you.

Some common problems you will encounter when your edge isn’t well defined is:

  • Overtrading
  • Getting out early
  • Not cutting losses

Once you have become proficient at defining your edge the next step is flawless execution. This is the holy grail of trading.

Most new traders focus purely on strategies. When they fail, they blame it on the strategy and move on searching for a new strategy or “holy grail”.

In reality it’s most likely not the strategy, but poor execution of that strategy.

This all leads to what I call the education loop, which completely halts your progress as a trader in it’s tracks.

Instead of focusing on execution, a failing trader will constantly be in the search for the Holy Grail and consuming as much knowledge on strategies and indicators as they can.

If you’re trading a strategy that doesn’t have potential to be profitable, that’s 100% on you. Verifying any strategy has the opportunity to be profitable when properly executed is YOUR JOB as a trader prior to ever even placing a trade.

Backtesting is a key component of becoming a successful trader.

I often say screen time makes the dream time. That doesn’t mean you sit all day staring at monitor just looking for the next setup.

When things are slow and after hours I’m always working on development, backtesting, and studying how deploying different management techniques on trades I took, could potentially improve my results.

Backtesting is even more important for new traders as it’s free repetitions, and as many of them as you want.

Only through repetition will you truly learn any trading strategy.

No strategy will never be a red light green light system. It’s what we achieve to reach as traders but realize that there’s always going to be some discretion when it comes to trade selection and management, as no two setups will every be the exact same.

Now that you have an understanding why most traders fail, let’s look at a proven process you can use to avoid these mistakes and change your trajectory.


THE PROCESS

The following is a simple yet proven process you can start implementing RIGHT NOW to increase your odds of becoming a successful trader.


1. Stop Trading Live Money

Stop being tempted to trade live money when you most likely have very little idea of what you’re doing at this point.

Risking capital as a newbie, even if you have it, will most likely lead to some negative psychological impacts that will make your goals even more difficult to achieve.


2. Become an Expert at Defining Your Edge

Once again this includes not only the patterns you will trade, but what context must be present in order to trade them. Just as important you need to clearly define your trade and risk management.


3. Backtest

Backtesting is where you really learn and refine a trading system to fit your strengths and weaknesses.

The data will help give you confidence to follow your rules.

More importantly, it’s going to help you better understand drawdowns of the system. EVERY trader and trading system will have drawdowns. Learning to lose money is an important aspect of success.

Rather than revenge trading, you will begin to realize that a drawdown is just a part of the random distribution of trades. You will start looking at the performance of a series of trades rather than on an individual basis.

Backtesting also helps you poke holes in your system resulting in improvement and better definitions.


4. SIM Trade

SIM your edge for a minimum of 30 days where you see consistency and profit. If you can’t turn a profit on SIM, I guarantee that you won’t be profitable live.

This is such a fatal flaw that new traders make.

It’s like a rookie quarterback in the NFL who was amazing in college but lands on the worst team with the worst coach. They’re expected to go live right away and perform when they’re not ready for it.

Countless highly drafted QB’s have been put in these situations, only to have the mental side of their game crushed in the first few years and they never rebound.

Trading is no different. You have to walk before you can run.

You’re going to make mistakes. You’re going to break some rules and learn the consequences of doing so. 

You’re also going to learn that it takes time to understand and spot your setups in a live market. It will be a lot different than the time you spend backtesting static charts.

Knowing this, why risk your limited resources no matter how vast they are? 


5. Go Live

You’re ready to go live when your SIM performance says so.

Start by trading the smallest contract size possible for whatever instrument you’re trading.  Doing this will help solve a few problems.

First, you’re likely to lose money at some point in the beginning, so keep the losses small.

Second it’s going to protect you from any major psychological blows, AKA BLOWUPS.

Don’t increase your size until your execution and performance tell you that you should.


6. Track Everything

It’s imperative that you keep accurate reporting. You will take that data to continue to backtest and improve your edge by getting more descriptive. It will help you improve picking your spots when you look to place a trade.

You should also keep a daily trading journal where you grade yourself on trade selection, trade management, risk management, and so on. Use some sort of rating to track your scores.. 

Of course your tracking will be biased and not extremely accurate, but it does something very important. It keeps you conscious of what you’re trying to improve on. Trying to improve just 1 percent everyday will result in outcomes you’re very happy with.

You have to be obsess with self improvement. Not just in trading, but in your personal life as well. They go hand in hand.

Finally you should have a trading plan and playbooks that define your strategies, trade management, risk management, market beliefs, goals, and so on.


7. Adapt and Evolve

You should constantly be looking to evolve and learn as a trader. As discussed earlier, this is a very competitive industry with a heavy tech focus so you’re bound to experience changes. 

There will be major shifts in the markets in the future that change the rules and strategies of the game. It’s simply a matter of time.


Conclusion

First and foremost please don’t let this post scare you! You have a process you can now use.

I felt it was necessary to shed some honest light on the trading industry in order to help realign your focus and expectations.

I believe the failure rate is so high due to the number of people who try to do this on their own by learning online, which usually is nothing more than the blind leading the blind and smokescreens.

You’re already light years ahead of the majority of most traders if you buy into these concepts. 

Trading can be extremely rewarding, not only financially but mentally as well. If you’re willing to put in the work you can achieve it!

I truly hope this post helps you on your journey.

If you have any questions please leave a comment below!

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Adam

Adam is the founder of Jumpstart Trading. He began his trading career in 2003 as a proprietary equity trader for GPC, which at the time was the second largest prop firm in the United States. While with the firm he achieved top 10 performances and became one of the youngest trainers for the firm. In 2008 he moved on to trade his own capital while developing multiple trading strategies and algorithms. He has quickly become recognized as one of the elite order flow traders in the industry. Today Adam primarily focuses on U.S. Index futures.

4 Comments

  1. Hi Adam
    Thanks so much for your great organized articles. I wonder if you have videos or papers on backtest strategy. How pro trader conducted it and what mistakes traders do make their test is not scientific enough.
    My best wishes.

    1. Thanks for the kind words Sirag! It’s funny you should ask that! I’m literally working on a post right now on backtesting and it will include a spreadsheet you can use. If you’re an insider you will receive an email when I post it. Should be done before the weekend.

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