An interesting survey has just found its way into my inbox, courtesy of Ratio Trading. The survey of more than 500 experienced futures brokers asked what, in their experience, caused most traders to lose money. There are some repetitions in the list, but it is nevertheless a worthwhile exercise to give it a quick read to again remind ourselves of the many investment pitfalls out there.
1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.
Usually, they liquidate the good trades and keep the bad ones.
2. Many traders don’t realize the news they hear and read has already been discounted by the market.
3. After several profitable trades, many speculators become wild and aggressive. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”
4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
5. Some traders try to “beat the market” by day trading, nervous scalping, and getting greedy.
6. They fail to pre-define risk, add to a losing position, and fail to use stops.
7 .They frequently have a directional bias; for example, always wanting to be long.
8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a time frame.
9. They overtrade.
10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system.
11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.
12. Many traders break a cardinal rule: “Cut losses short. Let profits run.”
13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.
14. Often traders have bad timing, and not enough capital to survive the shake out.
15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.
16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.
17. Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.
18. Too many traders are under financed, and get washed out at the extremes.
19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits.
This is really a lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.
20. Trying to trade inactive markets is dangerous.
Source: Ratio Trading, September 4, 2009.