Why 96% of Traders Fail and What to Do About It

I’ve written about trading psychology in my spare time for almost 10 years now. Every year I see newcomers leave the game financially crippled, and many will have PTSD to deal with for the rest of their lives. No one in the financial industry really questions the reasons behind this issue. Everyone blames the newcomers for being ill-prepared, too naïve, or even not determined enough. Well, my many years of working with traders tells me otherwise – and it is the big secret you need to know before you even think about trading as a way of making side money or building a career.

Classic Trader Mentality

The famous traders that we’ve gotten to know from books and media over the past few decades all share similar extreme character traits that normal people simply do not have. For example, a person may have above average conscientiousness (according to the Big Five personality system), but the really successful traders are more likely to be in the top 90%. And we are not talking about just one character trait here. You need certain combinations of these traits to make the person suitable for the classic approach to trading education—which is trial and error with key information always withheld, plus the uncertain nature of the markets that require a special emotional quality to feel comfortable living with uncertainty.

Yet, people from all walks of life walk into this game after hearing that it is a path to success that does not require a lot of higher education. Little did they know that they are nearly guaranteed to fail because they are not compatible with the education system. The system that retail traders have access to is a hack at best, because even major financial institutions have not put together any system that really works for normal people. They either handpick the ones with the right psychological profile to train from the beginning, or they let the natural on-the-job selection process quickly eliminate the applicants based on their performance.

Pareto Principle Applies Here

What really happens is that when you throw a bunch of people into a boot camp or stress-filled environment (in this particular case, trading or day-trading financial markets), the Pareto Principle applies.

What it means is that only 20% of these participants will see a good results thanks to their compatibility with the classic approach to trader training or education process. Notice that not all these 20% of participants are better traders. It is just that they are more compatible with the training and the elimination process that is thrown at them.

The rest of the participants are shamed for not being able to trade. That in turn makes some of them try even harder to prove they can do it too. However, they are putting their energy in the wrong place all together. Years of struggle and a sense of defeat are common outcomes of this process.

Just think of swimming—how many people can learn to swim by being thrown into the water without assistance and guidance? This is the kind of education you see everywhere in trading. No matter what these so-called trading strategies or secret methods are, or how superior they claim to be, nearly all of them are ambiguous and require awful trial-and-error approaches.

Not Every One in That 20% are Doing Fine

Those 20% that I mentioned above are not necessarily doing much better either, because many of them are just mildly compatible with the education process. The Pareto Principle applies again, so only 20% of this group of people would be fully compatible with the classic learning paradigm on trading, which means that it is really just 4% of all participants that get most of the benefit from the learning process and become successful traders.

So what happens to those 16% of traders who are successful in the learning process?

Well, as a start, they suffer psychologically all the time from their trading. They can perform but they are stressed out due to their psychological incompatibilities. Others do well in trading but get easily irritated and burst into anger both at work and at home. And then there are those who need to use substances from alcohol to various kinds of drugs to numb their anxiety both during their trading and also when they are not trading.

The classic learning paradigm for trading is a path of self-destruction for normal people.

The Costs and Consequences are Too High to Ignore

With all these negative impacts, we have to fundamentally question why anyone in their right minds would approach trading this way. That’s why for years I have told people to think very seriously before even trying to learn trading through this classic approach, which was really the only thing available. But human competitiveness always gets into people’s mind and drives them to jump into game.

There is also the ignorance bias, which means that many people underestimate the difficulties of the process while overestimating their ability to produce good results. I guess we cannot blame anyone for trying, since trading is such a sexy activity with huge profit potential compared to most other business activities and careers.

In addition to the initial lure that gets people hooked on trading, there is also the sunk cost bias that keeps many aspiring traders from leaving the game even after taking significant losses on the money they have. They do not realize that they are gambling away more money as they continue to approach trading the same way yet expecting a different outcome.

It is time for people to wake up from this nightmarish eco-system of trading education. I have seen too many people get hurt in the process, so I think it is time that we all really pay attention to this deeply rooted issue. We can do better than this.

There is a Different Path That Works for Majority of the 96%

And this is why I am writing this.

There is a better way to approach trading education that can enable more people to become profitable while also eliminating or minimizing the negative impacts from the learning process. Essentially, we can structure trading education in such a way to remove the stupid, gung-ho, or extremely competitive beliefs from trading all together. After all, the goal of trading is to make money, not feeding your ego or whatever other satisfaction you are seeking.

It may not be possible to learn trading through a completely different paradigm—say, 5 to 10 years ago. Back then, the technology was not as mature as it is now. With the current form of Internet, we can easily deliver online courses and training materials to enable aspiring traders to learn trading in a way that can ensure success for the majority of participants, not just that 4%.

I plan to write this as a series to outline what I think is the better path to trading education. It is a new paradigm to approach trading all together. If this new paradigm takes over the traditional approach in coming years, then my mission will be accomplished.

The best part is that what I propose does not require everyone to learn from me or buy anything from me. That’s not the point. Traders can utilize the materials available online to structure their learning properly so that they can see the breakthrough they deserve.

End Notes

I have planned to write about this for a long time, but due to commitments in my various obligations, I just could not squeeze the time out from an already overstretched schedule. But after my trip to Asia and several correspondences with some traders who are stuck in their situations, I realized that I cannot longer delay this any longer. I can always cut a couple of hours from my sleep here and there!

Part of the A Smarter Way to Learn Day Trading E-Mini S&P 500 series

Share