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Why Do Most Day Traders Lose Money?

Everybody wants to be financially independent; to have sufficient income with which to be able to live well and not just scrape by. Able to cater for all of life’s necessities as they arise as well as the occasional luxury. Above all, to be able to provide for yourself, your family and your dependents.

Trading the markets can undeniably provide an answer to all of these. With the right skills, software and experience, gaining an income through trading can provide you with a steady, predictable and recession-proof income whose hours can be uniquely tailored to your individual needs and circumstances. The question then is “how”?

Which is better? Day Trading or Swing Trading

There are two main styles of trading: Swing trading and Day trading. Swing trading is when trades are held open for more than one day and up to several weeks, while day trading is when trades are opened and closed in the same trading day.

Day trading is a logical option for people who have time to spare during the day.

There is a commonly held belief that day trading is more lucrative than swing trading. Day trading is therefore seen by many as a quick way to make money but is there any truth in that?

The answer is that it’s all relative. Yes, of course day traders make money – just like swing traders do but conversely many day traders also lose money – just as swing traders do.

Why do so many day traders lose money?

There are many reasons why so many inexperienced day traders fail to reliably generate profits and here are ten of the best…

1. Hidden Fees
Hidden fees rank amongst the top of a day trader’s greatest foes. Fees are paid with every trade that a trader puts on. The trader pays the spread to the broker with each trade (which is the difference between the buy and sell price of the financial security traded) and the trader also pays a commission to the broker on each trade (a charge for the privilege of doing business with them). These fees rack up very quickly with increased frequency of trading and can easily wipe out profits.

2. Overtrading
You might have heard that anything worth doing is worth overdoing. Not so with trading and this is a surprisingly common problem. Especially after a losing streak, a trader may want to recover their losses by trading more often and take on more risk with larger position sizes. The trader expects to see a reversal of fortunes and increased profits but, on the contrary, overtrading produces poor results as the trades are often ill thought out. Not to mention, of course, increased payments by way of commissions and spreads generated by the increased number of times trades that are put on.

3. Revenge Trading
Closely linked to overtrading is the concept of “revenge “trading where, following a significant loss, the trader is out to take revenge on the markets for taking their hard-earned money. Things just got personal. Trades become more frequent and position sizes larger. The hope is that the increased frequency of trading will bring in more revenue and they can “get their money back” from the market. This often has the same poor outcome as overtrading and can simply dig the hole deeper.

4. Poor Risk Management
This is another factor that commonly causes poor performance amongst day traders. Taking positions that are far too large for the trader’s account size. Risking too much of their trading capital on each trade can significantly deplete a day trader’s trading bank should they experience a number of losing trades in a row.

5. Tight Stop Loss Levels
Placing the stop loss level too close to the market price and getting stopped out of trades frequently can pose a significant risk to a day trader’s survival in the business. This is usually motivated by greed, which leads the trader to believe they can make lots of money for next to no risk.

6. The Need To Make Money Quickly
This is usually in response to the pressures of life, and is enough to make a day trader take risks they would not normally take. They may end up risking too much capital on each trade and could easily lose a lot of money if a few trades go against their positions.

7. Pride and Bragging Rights
Some day traders are desperate to make money, not necessarily out of need or greed but just for prestige, ego and personal pride. This urge has been the downfall of many would be traders and can quickly escalate to taking on unimaginable risks in the hope of unrealistic returns. Needless to say, this can be incredibly harmful to your trading account; at best harming your long-terms gains but at worst wiping it out entirely.

8. Fear Of Missing Out (FOMO)
Another common one. The enthusiastic trader is anxious to make money now and doesn’t want to miss out on the action in the market so ends up making the wrong move or when the conditions aren’t right out of sheer panic and anxiety. Take your time and make sure the opportunity is right. Being led by a fear of missing out produces poor trading results.

9. Not Trusting Their Strategy
A solid and thoroughly back-tested strategy is crucial to consistently generating an income from trading. A day trader can sometimes get into the habit of second-guessing themselves because they don’t entirely trust their strategy. Sometimes it is simply that they are not being patient enough to wait for the strategy to set up correctly. Entering trades either too early or too late is a sure-fire way to lose money.

10. The Fast Pace of Day Trading
Do you live life in the fast lane? Some day traders are unable to keep up with the fast-paced world of day trading causing them to chase trades, make mistakes and rack up losses. If you prefer a slower pace of life then there are other trading styles that will suit you perfectly. You wouldn’t drive at 30 on a motorway; if you’d like to day trade then prepare to feel the need for speed.

One More Thing

I couldn’t end this article without mentioning the “D” word: Discipline.

Trading is a very “human “activity, one where our “humanness”, with all its vices and virtues, interacts with the markets. With trading, and especially true in day trading, it’s impossible to blame our trading mistakes or lack of consistency on anything else but ourselves.

That’s where discipline comes in. The necessary discipline to learn the trading strategies, analyse the charts correctly, wait patiently for the trades to set up, put on the correct position sizes, effectively manage risk and stay in control of our emotions and expectations.

Even though the odds stacked against day traders may seem formidable, they can be overcome with the right trading education. With the right training, software, support and strategies anyone can learn to overcome these hurdles and become a consistently profitable day trader.

The Importance Of A Trading Education

Money management, identifying risk, chart patterns, psychology, routine, personality, strategies, software and training are incredibly important for being able to reliably make money from trading. Whether this is your first time taking on the forces of the market or you’ve had limited success and want to improve that potential, we have a course that’s right for you. If trading sounds interesting to you, then please remember to check out Learn To Trade Online; it’s a FREE on-demand training course that we offer and covers day trading, swing trading and many of the basic concepts. In the mood for something a bit niche? Sign up to our next live and interactive topical webinar – a 2 day introduction to trading taking place in April 2022. Book your FREE spot now!

Are you ready to start your trading education? Join our Pro-Trading Course and learn how to generate a reliable, recession-proof income that fits around your professional schedule or even turn trading into your full-time job. Click here for more information.

Further Reading:

Should I Day Trade or Swing Trade Gold?

Should I Day Trade or Swing Trade Gold?

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When Should You Trade A Stock?

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