Saturday, December 16, 2006

Why Do Most People Lose Money Trading

Why most people lose money trading in the market really isn't a mystery. We all have emotions that come into play when money is at stake which causes us to do the wrong things over and over again. FEAR and GREED are what rules us and the markets that we trade thats why chart patterns tend to work. Chart patterns are a visual representation of fear and greed at work and these emotions leave their footprints on the charts for the well trained eye to see. For example nothing makes a market rally more than trapped shorts.. Charts will clearly show this to you by looking at the way a stock closed and the volume and the way it opens the next day. But even with a good grasp of chart patterns, traders still lose money in the market. Why is that? Well I think if more traders spent more time on self analysis than technical or fundamental analysis, they would make more money.

I know from my own trading that I've lost the most money when I'm on tilt.. What I mean by that is when I am stressed out, maybe my last few trades were losers or there is something that is on my mind and it is bothering me. It's at these moments that money is lost and I would try to make it back on the next trade by trading very heavy and of course we all know how that worked out..I lost even more money! Then you start thinking to yourself if only I did the opposite of all my recent trades I would have made a fortune. So then you begin to doubt yourself and even entertain the idea of fading your own opinions! I know, I've been there.

So how do we make money in the market. I believe the way to make money is by taking as much of the emotion out of the trade as possible. It is so hard to do this but it's the only way if you want to be successful. You have to make your trading more mechanical and you do this by having very clear rules of how you will enter and exit the market. If your rule (based on your research) says that you must get out if a stock closes below last week's low, then you get out..end of story. So having rules can help a great deal especially when things start to get bad. Another way to take the emotion out of a trade is by trading smaller. Ever notice how the more money you have at risk, the more emotional you get? But what happens when you have a small amount of money at risk relative to your account size? I'll tell you what happens, you usually make money because you are trading properly not emotionally.

What you need to do is find a simple approach to the market that you are comfortable with, have clear rules about entry and managing the trade and risk an amount of money that you are totally comfortable with. Also think in terms of probabilities. Don't judge your success based on the results of an indivudal trade. What you should do is judge your success based on a series of trades over time. If you do this, you will notice less stress in your trading, you'll sleep better at night and hopefully if your approach to the markets has some substance to it, you will start to see profits on a regular basis..Oh yeah, one last thing...don't get emotional when you start making money!

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