Why Do Trades Often Lose Money?
Why do I keep losing instead of generating an outcome? When it comes to trading, there are many reasons why a deal or a sequence of deals may go wrong and end in a loss for the trader. The factors that influence it can be divided into internal and external ones. Internal factors may include the trader’s emotional state, the knowledge they possess, their experience and approach. External factors are those that a trader has no control over: market state, supply and demand rates, crowd psychology. In today’s article, we will look into all of these aspects that contribute to losses.
Internal factors are those that a trader can work on and improve. These things depend completely on the trader and it is a trader’s responsibility to eliminate their influence on their trading strategy.
Emotional state. A trader’s psychology plays an immensely important role. Among all other factors, the state in which one is trading may be the reason for some bad decisions. If a trader feels anxious or angry, it will manifest itself in the decisions they make. But don’t get it wrong: positive emotions are not helpful either. Excessive joy, excitement and misleading hopefulness may do as much damage.
Lack of knowledge. Some traders, in an attempt to escape learning, turn to robots, some seek help from “trading managers” that often turn out to be scammers. Some simply rely on luck and trade occasionally, with no preparation. Needless to say, treating trading as a game will most definitely end in losses. Waiting for help from others is merely naive. A trader has to learn about what they are doing and they need to rely on themselves. Before making deals, it might be a good idea to learn about the best and worst trading hours and the assets that are performing well or bad. Rational decisions can only be based on knowledge, not luck.
No risk management. One of the main reasons for losses is the absence of a risk management plan. Traders watch their deals go into deep loss before they close them, they disregard the use of stop loss levels and they risk their whole balance on a “sure thing”.
High expectations. Many traders believe that they deserve to earn a lot of money. That is why they rush into trading and make deals without thinking them through and no backup plan. However, trading is not a question of deserving, it is a question of skill. Unrealistic demands will only create problems, so it is better to stay humble and keep learning and practicing.
Not everything in trading depends solely on the trader. One may have a sure strategy that works well, and still bear losses from time to time.
The market is crowd-driven. What does it mean when an asset is continuously rising? It means that more and more people are buying into it. More buyers means higher prices and the asset may significantly rise. But at some point, less and less people want to buy it at the high price and those who already own it might panic, expecting the price to fall. They may decide to sell it. As more people sell it, the asset becomes less valuable and drops in price.
That is a very generalized explanation, but it shows how crowd psychology influences the market and this pattern does not depend on one individual trader. It may be hard to not get sucked into the crowd and not be influenced by others’ opinions, but traders need to learn to evaluate the market critically and think for themselves.