Top 5 Reasons Why Traders Lose Money 💰Don’t Make These Mistakes!!!

In today's episode, I'm going to share with you the top five reasons why most traders ultimately will end up losing money. It's not because you don't want it badly enough, and it's not because you don't try hard. It's because we are all set up to fail from the very beginning. When it comes to trading in the market, if you follow your natural impulses, you're almost guaranteed to lose money. Your natural impulses will be selling and panicking when something is dropping, and jumping in and chasing when something is moving higher. And what we know is that we need to be doing the opposite. We need to be buying off of support with a well-understood level of risk, and selling into those big extensions. So, the only way to be consistently profitable is to find a way to override your gut intuition, and instead have the discipline and the commitment to follow a strategy. Now, the only way to have the belief that this strategy will work is if you've actually been able to backtest it. Once you've backtested a strategy by trading it in a simulator, or by looking at the metrics of someone who's already been trading it for many years, then you can understand, okay, this is a strategy that works, but I have to follow the rules. So, as I walk you through the top five reasons why most traders will lose money, these are going to become the obstacles that you need to avoid in your journey of learning how to trade. So, let's begin at the top. The number one leading cause of failure is when you overestimate your skill level. When you think you're better than you really are. And a lot of us do this. It's just a cognitive bias that we have, that we think we're doing really really well. We think we've got a lot of skill. When we first start trading, maybe you watch a couple of YouTube videos, maybe you've done a couple platform demos. You get in there and you realize how easy it is to press the buttons, certainly on some of the commission-free brokers. They want you to trade, because the more you you I trade, the more money they make. So, they're not going to throttle us back, even though that's what's good for us to trade less by focusing on higher quality setups. In fact, they're going to do the exact opposite. They're going to encourage you to trade a lot. So, they make trading super easy. But, when you overestimate your skill, what does that really look like? It looks like you confidently trading, even though in reality, you don't really know what you're doing. And I did this when I was a beginner. I can I'm ashamed to admit it, but when I first started trading, I would put my entire account into one position. I was taking huge positions. I'd buy 20,000 shares, 30,000 I'd buy as many shares as I could afford. And I'm going to tell you something. That's a recipe for disaster. You probably know that, maybe, but my impulse, right? My gut feeling was I want to grow my account, and I believe so much in this stock that I'm going to throw my whole account into it. So, here's what you have to do. You have to remember that the you 6 months from now will be better equipped to trade with big share size than the you of today. And no doubt the you a year from now will even be better equipped to trade with that big share size. So, you have to be willing right now to pay your dues, to trade below your skill level. And when I'm talking about below your skill level, what I'm really talking about is the difference between your skill and your risk. So, if your skill is relatively low, because you're a beginner trader, so let's just say you're a, you know, level level one, just for the sake of creating a system. And then as as in terms of risk, you should probably trading with like 100 shares. But, what I did was I was at level one, and all of a sudden I'm already trading with 10,000, 20,000, 30,000 shares, right? So, that's a mismatch between skill and risk. And the the cause of that mismatch is when I overestimate my skill. I think I'm equipped to trade big. I see other people making big money, I want to make big money, too. So, the FOMO, the fear of missing out, overrides my logical brain and says, "Even though you only have 2 months of trading, go ahead and take your huge position on this stock. The market's so hot, you'll be fine." But, the result, over the course of weeks and months, you may have one or two lucky beginner trade, you know, beginner trader wins. It's beginner's luck is great to have, but at the end of the day, over the course of weeks and months, this will not pay off. The result, in fact, of what's going to happen is your P&L will look like this. You're going to start trading, and maybe you do have a little bit of beginner's luck, but ultimately, that beginner's luck runs out, and you have a trade that goes south, and you panic. You hold way too long, you have a huge loss, and that huge loss gives up anything you made in the beginner luck phase. How many of you experienced that? Then, maybe you have a little bit more sort of sideways price action, you're kind of, you know, sideways green days, you're kind of trying to figure out what's going on here, and then boom, it happens again. And now, all of a sudden, your account is heading south. And the reality is, people give up trading not because they couldn't have potentially become a successful trader, but because they ran out of time. In fact, it was just about a week ago that I saw a member at Warrior Trading who said they began trading in 2022, I think it was 2021, 2022, something like that. And uh they began trading, and they promptly had a little beginner's luck, the market was sort of hot the at the beginning of '22, and then they began losing money. And they had this long drawdown. Now, things turned around for them, and they've gotten all the way back to here. So, as of right now, they are right here. And he said, "You know what? I've decided to stop trading because it's just not working out. I've been doing this for 5 years, just about, and I don't have a lot of profit. And I said, "Wait a second. What about if you looked at it just through this lens right here? For the last 18 months, it sure seems to me like you know what you're doing." And he said, "I do, but the total amount of money I've made, I mean, I don't remember exactly how much he had drawn down, but the total amount that he had drawn down, the total amount he made, he didn't feel like it was enough to continue on." And I think that this is really sad because this is a trader here that I think could actually become quite successful. In fact, over the last 18 months, in that window, they have been successful. And so, the difference between making $50 a day and making 500 a day, that's 10x, that's a big difference, right? 500 a day, you're talking about $100,000 a year. That's a six-figure salary. That's definitely worth continuing to focus on trading. $50 a day, 10,000 a year, no, it's not worth it. But what's the difference between 50 a day and 500 a day? It's increasing your share size. So, for the sake of argument, let's just say this trader has been using 100 share positions for the last year. They've been using relatively small size, and the drawdown is relatively controlled, and the recovery is fine. Well, what if they jumped that up to 1,000 shares? What if they went up to 10,000 shares? Then all of a sudden, that's 10x, that's 10x, and now you're talking about, you know, $5,000 a day instead of five instead of 500 or 50. Now, it's it's worth noting that you can't just sort of have this straight increase in profit with increasing share size. There is a point of diminishing returns, which I've experienced in my trading, but you can scale in certainly from small size of 100 shares up quite a bit before you begin to see these diminishing returns. So, in this instance, you have a trader who actually is underestimating their skill a little bit and is overlooking the fact that they've made great progress because in total over the last, you know, 5 years they haven't made as much as they want. And I get that. But the reality for most beginner traders is that you come in with skill level of one and you trade with a share size that is not appropriate for your skill level. And so the issue here is that you burn really hot. I've seen so many traders who come in and they'll post a green day where they're up $7,500. And in our chat room, you have a badge based on how long you've been a member. So when I see a brand new member post a $7,500 green day, I'm always like pump the brakes. You're trading with really big size. I'm happy for you that you had your win, but it's probably going to be beginner's luck because you keep knocking 10,000 share positions and one of these flashes down a dollar a share, you're going to be a deer in the headlights. You're not going to know what to do. You're going to hold. Next thing you know, it's down two, three, four dollars a share, you're down 30, 40 grand. And yeah, that first $7,500 win was nice, but it's gone. So I encourage you to trade with smaller share size even than you think you probably should. Even though it's going to feel a little counterintuitive to size down, by sizing down you focus on the patterns, you focus on trading the right stocks, and you don't get caught up nearly as much in the emotions that come with winning and losing compared to someone who's trading with size that's way too big for where they're at. So I'm in a position right now where occasionally you'll see me take 50,000 shares, 75,000 shares, maybe 100,000 shares. And I've been doing this for a long time. So if you're trading even with 20,000 shares, 10,000, most likely that's way too much size. So the amount of money you make is directly correlated to your skill, but it takes time to refine your skill. It takes time to develop your own educated intuition that's not based on gut emotion, but it's based on statistical data of knowing the type of stocks you make the most money on, the time of day you make the most money. I mean, I'm consistently trading stocks that meet my five pillars of stock selection because I know that those are the types of stocks I make the most money on. So, every day when I'm pulling up my scanners, it's not a guess that, oh, this might be the type of stock that I should trade. It's based on the fact that these scanners have taken all of my trading history and have now begun searching the market for the type of stocks I make the most money on. So, trading for me in a way has become rather boring because it's not about, you know, these big home runs or doing anything crazy. It's just about showing up every single day and following the step-by-step checklist of the strategy. And it takes a lot of discipline to do that. So, number one leading cause of failure is overestimating your skill relative to where you're actually at and by taking too much position, too much risk, too many too many shares on your trades. Number two, the second leading cause of failure is not recognizing the market environment that you're trading in. This is something a lot of traders are struggling with right now. We're currently in a market that's a bit hot and cold. We'll We'll have one day where we have a stock that goes up 700, 800% We've got a ton of great price action and then the next day is crickets. We have nothing. And that makes it very difficult. You try to size up and get aggressive on the wrong day and there's nothing to trade, you're going to lose money. On the other hand, if you're under trading when the market's hot, you're not going to capitalize as much as you can on that opportunity. So, here's the way I approach this. Skill is something that's in our control. We can control how much we accumulate new skill, how much we are practicing. The condition of the market is an external variable. It is totally outside our control. The market could be really hot, the market could be really cold, and we have to adapt. Now, what's frustrating for a lot of traders is that the same exact strategy will perform differently on two different days. On a day when the market's hot, you could have outsized winners. On the day the market's cold, your winners could be very small, or you could even, of course, have red days. How do you know at the beginning of the day what type of market we're in for right now? Ultimately, there's a few different things you can do, but one of the best ways is to slowly dip your foot in the water as you begin trading each day, so you're not going in full size, whatever full size is for you, on your first trade. So, what I like to do on my first trade is take a starter position. And if that trade works out well, I take my profit. I now have a little cushion on the day, and on a good day, there'll be dozens of opportunities. But on a bad day, there's very few opportunities. So, on a bad day, that first trade with a starter position doesn't work, I stop out for a loss, but it's a small loss. And now, right away, the caution flag is out, and I know, uh-oh, that first trade, because all of the stocks I trade and all the setups I trade meet my five pillars of stock selection and meet one of the candlestick chart patterns that I rely on. So, if a pattern that I know works well in a good on a good day, in a good market, isn't working, that immediately paints the picture of the type of market we're in. Now, there are some other things that you can do to help evaluate the strength of the market. And one of those is looking at our top gainer scanner each day. Now, whether you're using my scanners or you're using a scanner with a different platform, it doesn't really matter, but when you look at these scanners here, you're looking to see how many stocks are up over 100%. Now, we have one stock right now that's up uh 1,200% but it has very light volume. These are typically the result of either a stock that's done a reverse split, a stock that's done an uplist from the OTC market, or a stock that maybe has done a simple change or something like that and is um incorrectly showing that it's up 1,200%. So, the second leading gainer, but with 70 million shares of volume, is CODX. It's up 79%. So, the fact that today we don't have any stock up over 100% by itself is an indication that the market is a little colder. Now, this is the market that we're in. We need stocks up over 100% to get excited. And when we have stocks that are up over 100%, that's when we see some really big action. Now, there were some moves earlier today, and this is also helpful. You look at the some of the stocks that made the big moves, and this is one right here that went from about $2 a share to $6. So, really nice move, but it did not hold up. In fact, the company didn't even have news to support the move. So, when we see something like that happen, we see the pop and then it rolls over, it doesn't hold, that's also something to be aware of. So, each morning, you can do a check-in with the market looking at the leading percentage gainers, how much are they up, and looking at the stocks that hit the scanners earlier today and the leading gainers to see did they make a huge move and then now they've pulled way back down? Because then that tells you that the market, while a little bit frothy because we're seeing big moves, is not holding up super well. So, now, even if you've got your skill totally dialed in, if you are unable to accurately read the current state of the market, you will still fail. You will have a problem. Because what you will do is you will take a ton of risk on a day that the market is not calling for it. You'll overtrade on day that's total garbage. And then on a day that's hot, you might under trade. You might take a couple trades, get green, and then call it a day. And so, there's a book that I've got a couple books that I recommend and I'll put them both right here on the whiteboard. So, these two books, Thinking in Bets and Quit: The Power of Knowing When to Walk Away. Thinking in Bets is about making smart decisions when you don't have all the facts. That sounds a lot like trading, and it's true. So, this is a great book to read when it comes to thinking about how much to risk, and this is a great book when it comes to knowing when to walk away. If you walk away too soon on any given day, you're leaving money on the table. On the other hand, if you stay too long, you're giving back profit. So, you've got to be able to accurately measure the current strength of the market today and respond accordingly. This requires radical acceptance. You have to simply embrace that the market is totally external. I have no control over it. So, if it's a good day, awesome, I'm going to react to that. If it's a bad day, okay, I'm going to respond to that. Now, if you imagine someone going surfing, wherever you think of a place to go surfing, Hawaii, I don't know, wherever you think of. You go out and you look at the ocean, and let's just say it's flat calm. There's not a single wave out there. Well, that tells you the story of what you're going to get today. You're not going to get any waves to ride. You might as well go find something else to do. On the other hand, you get out there and you've got beautiful waves, it looks really great. And then in the third scenario, you get out there and it's like a a a hurricane, a typhoon. It's a massive storm. Well, that's too risky as well. So, you've got to it's and now it's very easy to read visually what the ocean looks like. You could see it right in front of you. And yet, reading what the market looks like, strangely, is very difficult for a lot of traders. And I think that it's difficult because we get stubborn. It's difficult because things can go from being very flat and calm to suddenly a stock makes a big move and you have a great opportunity. And that is true. But is it likely that things will go from dead flat to suddenly the best trade of the whole year? Not typically. Typically, if you're going to have the best trade of the whole year, it's at that middle point where the action is really good. You've been seeing really predictable breakouts, and you're going to feel confident taking bigger and bigger and bigger size until it finally, you know, culminates in the best trade of the year. That's usually how it goes down. It just It doesn't just come out of absolute nowhere, and it doesn't come on one of those days that's just totally crazy and you can't trust anything. So, here's something that I've been thinking about. I have a good hunch that the market is going to be improving in the coming months. Cyclically, it usually does, and we've got some big catalysts coming out. So, I tell myself, can you just bide your time? Can you be patient? Can you pay your dues? Can you wait this out? Can you remember that in 6 weeks, you know, a month, 6 weeks, we're probably going to see a lot more action than we're seeing today? So, just get through this period. Just survive. The concept of survival. Survive till you thrive. The longer you can keep your head above water, inevitably, you'll be picking up skills and improving your intuition the more time you spend in the market. So, that's another vote for not being the trader who comes in and goes huge and then blows up within 6 weeks. Cuz 6 weeks wasn't enough time to accumulate that educated intuition that I have today. I've been accumulating it for years. So, even if you weren't making a lot of money in the market, but each day you were accumulating a little bit more skill, a little bit more experience, you would benefit as a result of that. So, it's very important to think about trading as a marathon, not a sprint. Number three. The third leading cause of failure is traders who lack discipline. Having the discipline to trade with smaller size, even though you want to hit that home run and have a big winner, is difficult. Having discipline to accurately assess the current condition of the market and not just trade the market you want to be in requires discipline. Discipline is, no doubt, one of the biggest challenges for beginner traders. And it's a challenge even for me as a more experienced trader, because discipline is not something, like riding a bike, that once you have it, you've got it forever. Discipline is something that you can have for a period of time, and then it can kind of slip away. You have to constantly be exercising it like a muscle. So, you know, if you lift every day, and you can tell that I'm someone who obviously lifts every day, you build your muscle, you build your muscle, you stop lifting for 6 months, you get a little complacent, you're like, "My arms look great. I don't need to lift every day." And then all of a sudden, things kind of fall apart, you go back to the gym, uh, you can't do it. Or or worse, you know, let's just say you get a flat tire, and you need to change your tire, and now you've let your muscles atrophy so much, you can't even change a tire. "Oh, I'm so embarrassed. I can't even change my own tire." When you needed it, it wasn't there for you. Now, this is an interesting thing with discipline. When the market is really hot, you can typically be less disciplined and get away with it, because everything just seems to keep going higher and higher and higher. That's the rising tide that lifts all ships in a big bull market. But when suddenly things get difficult, you need to pump the brakes and slow down. And yet, from that long period of things going well, you got to be a little complacent, you were a little sloppy, and you weren't needing to continue to strengthen that muscle of discipline. And and likely you didn't, which means when things finally slow down, you can start to spiral. And so, I've seen this happen with many traders, where you'll have a nice period in a hot market of having, you know, decent profit, little drawdown, decent profit, and then suddenly things start to get slow, and you don't you're not prepared for it. You know, you you have these this first drawdown and you think, "Okay, I'll make this back real quick. I'm going to boost up my share size." Well, wait a second. Isn't this drawdown telling you the condition of number two, the overall market? That the market's no longer as conducive for your strategy as it was back here. So, wouldn't that that be actually the time to reduce your share size? Yes, it would be the time to reduce your share size, but now your emotions are telling you the opposite, increase. You increase and that increases the speed at which you lose. And then you start getting the point where you're down so much, you're emotional. I just gave back, you know, six months of progress. I can't I I don't even know what to do except throw a Hail Mary pass and hope I swing right back up. But how often do you think that happens? Almost never. Almost never, just like winning the lottery. It doesn't happen almost ever. So, when you start swinging for the fences, Hail Mary pass, buying lottery tickets in trades, that's when you just are spiraling and you're going straight down. And it's it's it's scary in a way how you could be a trader who had, you know, six months, 12 months, a year plus of progress and then all of a sudden everything falls apart. What changed? Your skill was here, but the market changed. The market changed and you didn't have number three, the discipline. You didn't have the discipline to be able to react to the changing market. So, one of the things I've often said is that my biggest struggle as a beginner was learning to take my foot off the gas sooner. And I've gotten better at it as I've gotten older. I've gotten a little bit like it it's it's easier for me just to give up and kind of submit to the market and just say, "Oh, no, not going to fight this. Not even going to try." Cuz I've been through this before. And when I try to fight it, I just get beaten up. It makes the losses bigger. So, it's easier for me to kind of batten down the hatches during the storm and say, "All right, I've already gotten knocked around a little bit. I don't need to make this worse for myself. I'm just going to hang tight." And so, in recent years, I've had a lot more no trade days where I just say, "Nope, not going to do it." Whereas, in the past, I would just keep showing up and fighting and fighting and getting knocked knocked down and bruised and beaten. And and and I got nothing for it. I would be demoralized, frustrated, and angry. And all of that would lead me to be more emotional in my trading, which would only further uh fuel and accelerate the losses. So, calming down, being disciplined. And if that means adopting practice of meditation, adopting a prac- practice of physical exercise, which also requires discipline. You can build discipline in other areas of your life, and that discipline will come back and serve you in the moment you need it as a trader. So, discipline is is super important, and I think this is something that for a lot of beginner traders, they don't realize how important dis- discipline will be in their career until they've hit this first kind of drawdown and panicked a little bit. Number four. The fourth leading cause of failure is not understanding statistics. And I don't mean you should go take a statistics class in college or something like that or in high school, whatever. It statistics meaning that you can set the bar low to make it easier for you to be profitable, or you can set the bar high to make it more difficult. Which would you rather do? Set the bar low or set the bar high? You should set the bar low. Beginner traders don't do that. Beginner traders set the bar high without even realizing it because you don't understand the statistics of what it takes to be profitable. So, when we talk about profitability, we're always talking about the comparison of risk and reward, right? So, if you risk $1 to make $1, your accuracy in order to be break even is 50%. So, as long as you're right 50% of time, you'll be a profitable trade Well, you'll be break even. So, 51%, 52% and up, you'd be profitable. What if you risk $2 to make only $1? This was me when I was getting started. You would need to be right 66.67% of the time in order to break even. Well, as a beginner trader, I wasn't able to achieve that level of accuracy. So, I was losing money. On the other hand, what if you risk a dollar to make two dollars? You only need to be right 33% of the time in order to break even. And now, this is the spot where I want you to focus. I want you to think about risking a dollar to make two dollars. And okay, maybe you're risking $10 to make 20, but the ratio is the same of one to two, or we call it um we often call it a profit to loss ratio, and profit being first. So, profit to loss would be two to one. So, focusing on a two to one profit to loss ratio, what you've done is you've set the bar lower. So, even if you're right only 50% of the time, you could still actually be profitable. However, how do you actually convert this knowledge into profitability? And it begins by focusing on accuracy. If you focus on accuracy, and you don't have to be right 100% of the time, no one can be ultimately. You could strive for that, but it's not realistic. But, if you try to be right on as many trades as possible, inevitably, you're going to have to increase your quality standard. So, now you're focusing on stocks that meet the five pillars of stock selection, and I'll have an episode at the end of this episode to my stock selection class if you want to watch that. You'll be trading the strongest candlestick chart patterns. I'll put a link to candlestick chart patterns video at the end of this episode as well. So, you'll be trading the strongest stocks in the strongest patterns, and so your accuracy will be higher. As you increase your accuracy by focusing on high quality stocks, you're focusing on the type of stock that can give you a bigger move. And so, that's going to extend your and and increase the average of your profits. So, your average winners get bigger. And by by focusing on higher quality stocks, you invariably avoid the high-risk stocks, which are contributing to your losses being too big. So, for me as a beginner, I didn't have a good gauge of being able to measure quality. So, I was trading a little bit of everything. Small caps, large caps, options, penny stocks. And so, with all of the that trading, I had some big outsized losses. And anytime I would take that trade and panic and hold and average down, that one loss, you know, that one 5,000 or 10,000 dollar loss, I mean, it would bring down my average losers because it would be 10 times 15 20 times bigger than the averages, but it would bring down that whole average. At the end of the day, the loss is there. But I wasn't having winners to make up for it. That was the really frustrating thing. Sure enough, I would take a huge loss, but I never seemed to manage to take a huge winner. Why? Because when a stock would go up, I would take profit, which is the right thing to do. But when a stock would go down, I would add to the loser. I would buy more shares. And buy more shares, and buy more shares until finally it either came back up and I got out maybe break even, or I would take a massive loss. So, by understanding the statistics of profitability, you now have something to strive for. Number five, the fifth reason traders fail is they don't experiment. What does this mean? Here's something very interesting and I'm something I'm struggling with it, something I'm guilty of myself. When the market is going really well, you can be complacent, right? You don't have to be as disciplined, things are just going well. And when the market's going well, you may not feel the motivation to develop secondary strategies to your core bread and butter because you're making so much money, who really cares? But then when the market cools off for your primary strategy, you're thinking, "Ah, I wish I had a backup." But when the market is cold, it's not a good time to test a new strategy because you can't afford the losses that might come from making mistakes on it. So then, you're not experimenting when the market's hot, you're not experimenting when it's cold, and you've now boxed yourself in. So, it requires, number three, a high level of discipline to keep pushing yourself to experiment with new strategies even when the market is hot, but it's important and it will benefit you when the market is cold. So, there you go. The five most common reasons traders lose money. Misman- Mis- Over- Overestimating their skill, not understanding the current market they're in, lacking discipline, not understanding statistics, and not experimenting. Now, if you want to check out a couple other full-length episodes that I've got on the channel right here about stock selection, about reading candlestick charts, I would love for you guys to watch them. Links are going to be right there. I'll remind you as always that trading is risky, and my results aren't typical. So, manage your risk and always practice in a simulator before putting real money on the line. If you haven't already hit the thumbs up for this episode or subscribed to the channel, I hope you guys do both of those before you jump on to the next class. Thank you guys as always for tuning in, and I'll see you for the next upload real soon.