Why do traders fail?

[stevo]

In a recent interview in S&C (Nov. 2006) Van Tharp stated;

I think it is harder, for example, for a certain personality type that makes up 75% of the population to be successful at trading because they are not into theoretical stuff. They are into facts, so they are going to do well maybe trading from what they read in a newsletter, or getting advice from someone, as long as that person could give them the facts about why they should take the trade. But they will have trouble grasping the theoretical concepts I have been talking about that are involved in designing something that fits you. They would not even be interested in that.

I have to agree that there are some people that will understand the "theoretical stuff" and others that won't or can't. A fellow approached me about trading and when I mention understanding some basic concepts I get blank looks. I am not sure if it is too hard or if it is too much work or his brain works in different ways or what! But he is happy to use a tip sheet.

The other point in the Van Tharp's interview is the concept of designing something that fits you. It is surprising the number of people that want to trade short term that work full time! If a trader sits down and thinks through what their objectives are, and how the rest of their life will impact on their trading they could learn something.

 

[swingstar]

No, value types do not predict. They protect.

They try and buy a company for less than what it is CURRENTLY worth.

And as Douglas also mentions, fail to take in an important factor: The fact that the variable most causative of price (traders), couldn't care less about fundamentals.

 

[theasxgorilla]

This is an interesting thread.

I would tend towards a more "Van Tharp" explanation. Since Van Tharp has tested some random entry systems and shown them to be profitable when applied in conjuction with suitable position sizing I would suggest that over-emphasis on any analysis (tech, fund, astro...whatever) at the expense of money management and psychology is a key factor in why a lot of budding traders continue to be unprofitable.

I suppose this ties in with Realist's statement that prediction does not work. Once you accept that to be the reality your emphasis must shift towards money management (protecting your capital from loss) and psychology (protecting you from yourself).

 

[IFocus]

My own experience of why traders fail is that they simply don’t carry out enough testing or none at all.

From testing extensively comes to some degree a little more preparation for the psychology issues plus perhaps formation of an actual plan that may mean something.

Then there is the account that’s too small with the positions too large……

Focus

 

[coyotte]

My own experience of why traders fail is that they simply don’t carry out enough testing or none at all.

From testing extensively comes to some degree a little more preparation for the psychology issues plus perhaps formation of an actual plan that may mean something.

Then there is the account that’s too small with the positions too large……

Focus

This is the point i think Douglas is referring to --- our Analyst in question apparently had a plan --- But could not accept the fact that "Anything can Happen" --- probably realized it on a intellectual level but not on a deep seated personal level.
Holders of GYM on the Xmas day their Coal mine flooded could attest to this.


Cheers

 

[It's Snake Pliskin]

In a recent interview in S&C (Nov. 2006) Van Tharp stated;

I have to agree that there are some people that will understand the "theoretical stuff" and others that won't or can't. A fellow approached me about trading and when I mention understanding some basic concepts I get blank looks. I am not sure if it is too hard or if it is too much work or his brain works in different ways or what! But he is happy to use a tip sheet.

The other point in the Van Tharp's interview is the concept of designing something that fits you. It is surprising the number of people that want to trade short term that work full time! If a trader sits down and thinks through what their objectives are, and how the rest of their life will impact on their trading they could learn something.

I am happy for fulltimers to want to trade Stevo. Without the sheep can the abattoirs survive?

Your approach Stevo is a good one.
Regards
Snake

 

[It's Snake Pliskin]

No, value types do not predict. They protect.

They try and buy a company for less than what it is CURRENTLY worth.

So are you saying they buy to keep at their buy price? That is for it not to go up in price?

 

[michael_selway]

Most traders fail, much like most astrologers fail. Prediction does not work.... Yes!! Anything can happen.

Brokerage, taxes, and inflation reduce winnings, stop losses pull traders out of good stocks, trailing stop losses bring tax debt and brokerage fees to otherwise good holds. And charting is Astrology, it does not work!!

Shares should be bought for longterm dividend income. :

Astrology, what does Yogi think about that?

thx

MS

 

[spitrader1]

Correct cash market.
Facilitation traders [as an estimate]
Retail [as an estimate]
Excluding MM's [GS etc]

jog on
d998

so yK u are saying you can bait a facilitation trader?? Im not sure I agree with you on this. If I take on a line of 200k BHP how are you going to bait me with 2k or 5k BHP?

 

[theasxgorilla]

This is a good thread. Summarised so far, the key reasons why traders fail according to the ASF crew...

1. Absence of an actual trading plan

2. Applyinig the wrong method/system/strategy eg. having a plan that lacks positive expectancy or one that does not fit your personality or life situation

3. Lack of understanding of the method/system/strategy you are applying.

4. Not realising that inspite of having an actual trading plan anything can still happen (there are no absolutes in trading only probabilities)

5. Trading a plan that uses obvious entries and exits and falling prey to larger (smarter? better resourced?) institutions/hedge funds etc.

6. Lack of understanding of competing strategies that can damage your strategy (ties to point 5 above I believe?)

7. Over-emphasis on analysis at the expense of money management or psychology (some estimate proportions should be 10% analysis, 30% money management, 60% psychology, Van Tharp says 100% psychology).

8. Lack of discipline

9. Lack of confidence in your method/system/strategy

10. Not enough testing carried on a particular system (which can lead to insufficient confidence/discpline/understanding)

11. Too small an account size (undercapitalised)

12. Too large of a position size relative to account size (how many losses can you sustain before you're out of the game? a 50% loss means you need a 100% win to get back to break even.)

13. Inability to be happy with (do you have to be happy withlosses?? ) and accept inevitable losses

14. Inability or unwillingness to understand the "theoretical stuff" (prefer to be tipster/broker/ramper fodder).

 

[Freeballinginawetsuit]

As a society we constantly seem to require complicated answers or a process that seeks justification for decisions made.
The more complicated the process/justification>the more educated/valid the decision made!.

On a daily basis newspapers regularily provide a complicated analysis to what is a very basic scenario (more often in the Business section). Lets face it, many seem to feel the need to justify their income, this thread is no different .

 

[Kauri]

We are taught/conditioned to believe that being right equals success...
For me it is how you accept and deal with being wrong possibly/probably more than 50% of the time that determines your overall success.

 

[stevo]

On a daily basis newspapers regularly provide a complicated analysis to what is a very basic scenario

I always thought it was the other way around! They often oversimplify a complex situation to get the story across. One of the rules when writing a media release is to put the story in the first paragraph - that's often all we read. It may depend on what papers you read.

It's important to understand why traders fail if you are one of the failures, or you are trying to sell something to traders to help them succeed. The psychology of traders is very important to the marketing department!

 

[coyotte]

Interesting that most would seem to agree that mental attitude is of importance if not the most important aspect of trading -- yet it is probably the least discussed topic on any forum.

Wonder why this is so?

I have in hindsight been fortunate enough in the past to have spent a couple of decades involved in thoroughbred racing, to naturally now think in probabilities --- rather than insisting that a particular view should play out and blaming everything from my own analyst to a rigged market if it does not, just accept what the SP is telling you and act accordingly.

Although I didn't realize it at the time, developing this attitude can take years and is something that creeps up upon you as it becomes part of your everyday approach to life.

Probably wrong, but I don't think you can just switch your mode of thinking to suit the occasion -- when the pressure is on it's that deep down attitude that takes over and we are simply unaware of it --- this is the bit I feel that must worked on over the years --- they used to say it took a bookie 10 years until he KNEW the market, beginning to see what they really meant by that statement.


Cheers

 

[theasxgorilla]

Great post Coyotte, very insightful. Why is mental/psychology so under-discussed?

 

[Freeballinginawetsuit]

I always thought it was the other way around! They often oversimplify a complex situation to get the story across. One of the rules when writing a media release is to put the story in the first paragraph - that's often all we read. It may depend on what papers you read.

It's important to understand why traders fail if you are one of the failures, or you are trying to sell something to traders to help them succeed. The psychology of traders is very important to the marketing department!

Would tend to disagree on the media issue although at times space constraints could lead to a compressed version of misrepresented facts.

As for the flogging of books by marketing departments, well thats not rocket science. A bit like Macca's putting a free toy with their happy meals>traders reading a colorful book.
This year for Maccas its healthy meals>A couple of years time it might be a new book teaching how to trade the Chindia market.
To little......to late

 

[coyotte]

In the early part of his book Douglas points out that after a string of failures the first thing a new trader will do is try and learn more about the MARKET -- this includes everything from the actual markets to the variuse analyst techniques only to find that again he is setting himself up to failure -- Think most of us have been down this road repeatedly.

It is at this point hopefully it dawns on the trader that the problem may lay within rather than outside, else he is doomed to go through the cycle again.


Cheers

 

[Naif]

I believe that traders should have experince in fundamental + technical analysis and have good experience in risk and money management to help them to make profits cause traders always lose but successful traders should cover their losses.

 

[steven1234]

One thing i was recently told was "in the current market if you can't make money its best you not trade/invest in shares at all".

I think you need to loose some money before you start to learn about trading sucessfully. The once bitten twice shy principle applies. There are many in the market who are up due to the current bull run.

To answer the question posed we must define failure. In defining failure we must define what is sucessful trading? Is it making money? Is it making a return greater than interest? Is it making more than the index or is it making a return of 50% on investment?

I have noticed myself at times looking at some profitable holdings i have and being disappointed they are not making gains of at least 50% per month. If others can do it why can't i? Its only when you loose money that you will appreciate your gains made and invest wisely.

 

[Temjin]

One word, psychology.

Most people would dismiss that their psychology is affecting their trading results though. That's why most people fail at trading.