Characteristics of Traders Who Fail

We talk about what are the characteristics of winning traders, but today, we're actually going to focus on what are the characteristics of traders who don't make it.

1. This often isn't talked about, there are seven characteristics of traders who fail. they have a positive winning percentage.
2. Their losers are much bigger than their winners.
3. Their account size is too small.
4. Their trade frequency, they trade too much.
5. The ratio of time they spend holding their winners versus their losers.
6. Adding to losing trades
7. Trading without a stop loss

Let's look at number one, losing traders actually have a positive winning percentage, on average. This is a study done by a clearing firm that looked at all their traders that did not make it over many years. The average win rate of a trader who failed was 62%. Above 50, buy quite a bit. This is a little bit surprising, but it's not actually when you think about it. Why do they have a winning percentage because they take their winners too quickly and they hold on to their losers too long, which we'll come back to. Some of their losers will actually turn around and become winners, they'll be down a lot of money, they'll hold on, and they'll come back, and they'll close it for a win.

Number two, their losers are much bigger than their winners. On average, if their average win is one, their average loss is 1.88. This means that their average R is 0.53. Essentially making a half for every time, when they're right, they make a half and when they're wrong, they lose a buck. So essentially what's going on their account size is too small.

Number three, they trade undercapitalized, so because their account size is too small. They cannot handle any draw downs, any losing trades damage the account and make it very difficult for them to get back. Any losing trades damage the account and leave them without enough capital or collateral to actually trade. So this is a big problem.

Number four trade frequency. Losing traders trade way too much. They make mediocre trades, they make impulse trades. They jump in because they are fearful of missing out, but they don't actually just pursue high quality trades and these decisions, they add up. They add up by making it impossible to overcome commissions, to overcome exchange fees and to overcome slippage. You'll see that actually traders who really don't make it, a lot of times they get ground down and then when they get ground down too much, then they do something stupid, or they bet it all on black. 

Alright, number five, the ratio of time holding winners versus losers, traders who fail, hold their winners for a short period of time, and you're holding their losers a long time. There's the saying, I want you to think about this. The average trader who fails has fear in their winners and hope and their losers. Fear in their winners means they're fearful it's going to turn to a loss, so they take the profit quickly. There's an old saying in trading, you never go broke taking a profit. It was bullshit, you'll go really broke. Conversely, when they're down, they have hope. They have hope it'll turn around, they believe in the story, it'll work its way back and hope is what kills them. It's actually interesting, if you want to be successful, you flip this. You are hopeful that your winners will get bigger and you're fearful that your losses will get bigger.

Number six adding losing trades. Traders who fail typically add to their losers. They do this but in hope that by buying more, it only takes a little bit of a rally in the market to get back to even. So they look at their average cost and if I just get my average cost down and it comes back, I'm good. This makes them have their biggest position when they're really wrong and their smallest position when they're really right.

Finally number seven, the trade without a stop loss. Now this is really interesting because one of the things we talk about all the time in trading matrix is that stops kill our trading performance and they do, they do kill our trading performance. The math clearly supports this. However, one of the things you'll notice is that we do use initial stops, we do this to keep our accounts from taking too much damage. Now an operating premise for us is whenever we can get rid of a stop, we do it. We do this through options and options structures, so we don't need stops and then as the trade unfolds, we're not overly concerned about raising our stop, then we just manage the market and let the market go, but in the beginning, we do advocate for initial stops to minimize damage to the account. Traders who often fail, the stop represents failure to them. It represents a real loss and they don't want to face up to this, so they pull the stop. They might even put it in and then when the market starts to trade down to it, oh, no, I'm gonna pull this stop. This is so that they're not confirmed to be wrong.

There's a lot of wisdom in these seven characteristics. I highly encourage you to go back and take these seven, and go look and see which of any of these do you do in your trading, and be ruthlessly honest about whether you do or not. This could be really helpful for you. Check that out and stay tuned for next Tuesday when I come back to you with additional tips like today that will help you take your performance to an elite level. Have an awesome week. God bless.