Everyone is looking for ways to make money. While there are numerous ways to do so, trading is the first thing that comes to mind. It may appear straightforward, but it is not. Traders can make a lot of mistakes when they first start, which can result in a significant loss.
Whether it’s due to technological failure, lack of discipline, or perhaps a prolonged loss of trading capital, every trader will experience significant loss at some point.
According to FCA research, around 70-80% of people trading online lose their money. One broker in particular mentions in their risk disclaimer that, according to their own statistics, 67% of traders lose their money when trading on their platform, even when they use social trading (copying other traders).
Indeed, even those who do not lose money are unsure whether the profits are satisfactory or whether the time spent trading online is worthwhile.
Traders may begin to question themselves after experiencing a significant loss or losing streak, which often results in all the common issues that new traders face, such as getting out of trades too quickly, holding onto trades too long, skipping trades out of fear of losing, or getting into more trades than you can handle in an effort to get more winning trades. If you’re having these problems or have lost a lot of money, there are several things you can do to get back in the game.
From our experience in the industry, we have concluded that these are the 6 biggest reasons people lose money when trading online, and the reasons why, since 2008, our focus has been on developing portfolios using the power of AI and machine learning.
1. No Clear Strategy
A trading strategy outlines the trading style you intend to use, your chosen method for entering and exiting trades, and the tools and indicators you intend to employ.
Sticking to your CFD trading strategy is critical since trading within the parameters you’ve set will reduce the temptation to trade out of fear or greed. Overtrading, using too many indicators, reacting to market events and market sentiment too easily, and over-complicating the decision-making process can lead to paralysis, exhaustion and bad decisions.
It’s also crucial to recognise when your trading strategy isn’t working for you. Back-testing your trading technique and maintaining a record of your winning and failing deals can help you achieve this.
2. Poor Risk Management
Risk management is essential when you are trying to reduce your losses and maintain a safe risk/reward ratio. It can also help traders avoid losing their entire investment. It’s a necessary but frequently neglected prerequisite for success in active trading. After all, without a strong risk management technique, even a trader who has made significant profits might lose it all in just one or two disastrous trades.
First of all, check to see if your broker is suitable for frequent trading. Some brokers cater for traders who don’t trade as frequently, but they demand higher commissions and don’t provide active traders with the necessary analytical tools.
Attaching stops and limits to a position is another standard approach of risk management. This protects your capital by pre-defining the exit levels for your trade. A stop-loss order tells your broker that you want to end your trade at a lower price than the current market price. You should be prepared to ask yourself how much money you are willing to lose before you close your trade, then place a stop-loss order accordingly.
3. Poor Money Management
Money management is a method of reducing or raising the size of a position in order to reduce risk while maximising profit from a trading account.
One of the most common reasons for traders losing money is a lack of discipline and money management–probably more than half of them. It takes a lot of good trades to get to a certain position, but if you lose discipline or break rules, it only takes one bad trade to wipe out weeks, months, and even years of profits.
Two of the most common money management strategies for beginners are the martingale and anti-martingale strategies.
With each loss, Martingale algorithms increase the size of the position. Because the account is losing money, the trader will increase the position size to make up for the losses and make a small profit.
Anti-martingale strategies are the polar opposite of martingale strategies. When you win, the size of your position grows, and when you lose, it shrinks.
Before you choose the ideal money management plan for you, you should consider your trading personality. Everyone is unique, and no one else has the same personality as you, and trading is a very psychological activity, therefore you should use a method that best suits your personality.
Speaking of psychology, another important aspect of trading is the ability to control one’s own emotions. Psychology pertains to how each trader perceives what is happening in the financial markets, as well as how emotions and one’s susceptibility to certain biases might influence this perspective.
It is key to keep negative emotions out of your trading, and understanding how to reduce their influence on your decision-making is a difficult undertaking that can only be accomplished with years of practise. There are five frequent emotions–namely fear, greed, revenge, euphoria and pride–that can lead traders to potential large losses, so you should try to avoid them as much as possible. Luckily, there are several proven ways to control these emotions. Here are a few:
- Create your own personal rules. This might involve setting risk/reward tolerance levels for entering and exiting trades, for instance.
- Lower the size and leverage of your trade can really help to mitigate the risk of unfortunate events happening in the future.
5. Lack of Patience
Although the top investors and traders recognise the value of patience, it is one of the most difficult disciplines to master.
Patience will keep emotions and snap decisions in check. Quality research should guide your decisions on whether to enter and exit trades, and don’t forget that it can take some time for the price to catch up to the fundamentals.
Patience while entering a trade and patience while a trade is developing are both essential components of effective trading and investing. Allowing patience to evolve into stubbornness, on the other hand, is something you must avoid; exiting trades consistently according to set criteria is one of the finest ways to improve your trading success.
6. Unrealistic Expectations
There’s nothing wrong with having expectations, but expecting overnight success in trading is unrealistic. It takes time to grasp the markets and become profitable in them, just as it does in other professions or businesses.
Unrealistic trading expectations may cause more harm than benefit, since traders may make big mistakes while trying to meet their unrealistic goals. Because these expectations rarely come true, you’re also likely to be dissatisfied and frustrated when things don’t go as planned.
Hanging on to a losing trade is a perfect example of expectation management. When you have all of the indicators that you should leave, yet you choose to ignore them. You might even hunt for non-existent signs indicating your original assumptions were true, because you don’t want to admit that assumptions on the deal were incorrect, but you continue to lose money. In this case, it’s wiser to reduce your losses and concentrate on your next move. You will not be successful 100 percent of the time; even the very best traders do not achieve this level of success. As long as you limit your losses and benefit from your winning trades, you will be successful.
If your plan is to build a steady income from online trading then you need to understand that although promoted as an exciting journey or money-making opportunity – it is not so simple. Finding the ideal trading strategy is a continuous process that should be tailored to your personality and trading objectives. Even the most experienced traders can learn more, thus there is no limit to their growth.
This is why we decided to create arty and make it available to the general public, who are searching for transparency and a clear indicator of what to expect based on historical data and facts for each of our ETF portfolios. ETFs have been hailed as ideal trading instruments since their creation, and unlike CFDs, for example, are not so volatile.
Whichever way you choose to trade, here are some key things to remember:
- Always put sufficient measures for risk management in place
- Make sure to familiarise yourself with the markets
- Have a good knowledge of the underlying assets (choose ones you are familiar with)
- Have patience!
- Understand your appetite for risk and your trading personality
- Acknowledge how much you are prepared to lose
And finally, don’t be afraid to start small. It’s tempting to go large when you’re first starting out, but keep in mind that when trading with leverage, you have the ability to lose just as much as you are able to gain!