Today I’m going to go over three ways of thinking that cause 90% of day traders to fail and lose money before they ever get started.
Not Studying Statistics
The first thing I’ve seen is that they don’t follow statistics. When day traders go into a trade, one of three things will happen: the stock goes up, it goes down, or it stays in the middle and starts to consolidate. When a stock enters those price ranges, it becomes a possibility. It’s very similar to gambling and/or poker. Part of studying statistics in poker is figuring out the exact probability that you have of winning in any given situation. The whole reason casinos can open and make money is because there are specific odds for the people that visit to win, which are usually around 40%. But most of the time, 60% of the time, the casino will win, which is why anyone ever decides to open up a casino. If the casino did not win at least 60% of the time, it would go out of business. Even though the odds are always in the casino’s favor to win money, people still go into casinos thinking they will get lucky, beat the odds, and win the jackpot. That’s the wrong mentality. And when people go into the stock market using that casino mentality, it’s even worse, which is why most of them lose money. In the market there are even more statistics and possibilities. There are different caps, different alternatives, and different flow. All kinds of factors will affect the stock, leaving you with a lot of different options.
I personally track statistics in the stock market. Tracking statistics gives you an edge when trading in certain situations. If you can guarantee you will have around a 70% win rate when you go into a casino, you will win in the long-term. The only way the casino makes money is based on that 65 or more percentage of people that won’t win money compared to the small percentage of people who will. Now, use that same logic and statistics when thinking about the stock market. If you can find a method of trading where you win 70% or more of the time, you can use that method long-term and you will eventually be making money. That’s why casinos make tons of money, they have found their long-term method. That’s the base mentality you have to have before going into the market. And that’s the number one mistake I see people make all the time.
Driven By Emotions
The second reason day traders fail to make money is because people are driven by emotions. I see it happen over and over in a very predictable way. Most people, when they lose money, the first thing they would probably think is, “Well, how do I make it back? I want back. I want it back right now.” They get in a rush to make money, and the more you try to rush in the market, the more you get desperate and force yourself to go into low odds plays, resulting in even more losses. Eventually you’ll be so emotional, you’ll feel like you should just give up trading altogether because you think the market is not for you.
But if you remember what we discussed before, the number one reason people are failing is because they’re not watching the statistics, and the number two is acting on emotion. In order to have success, you have to be able to control both of those factors at the same time. When you are let your emotions control you, you forget about the long term. Sometimes you’ll get lucky and have a winning streak of 8 out of 10, losing only 20% of the time. Sometimes you’ll hit losses 3 or 4 times in a row. I understand how frustrating that can be; I get frustrated when that happens to me too. But when that happens, I make sure that my focus is on the long term. Those three or four losses shouldn’t affect you emotionally. You should focus on the long term. I’m learning to overcome that emotion because I know my statistics, I know my edge, and I know in the long term I’ll come out on top.
You Are Watching Other People’s Success
The third thing a lot of people have a problem with is comparison. Even I struggle with this at times! You go onto social media and you see people posting, “Oh I made this much money,” and “I made this amount of money”, and it can be really discouraging. You see the success of others and you think that they’re so far ahead that it will be impossible to catch up and make as much money as they have. But that’s the wrong mentality, you have to focus on yourself. At the end of the day it’s about your personal performance. And it doesn’t really matter what other people think or what other people have, as long as you are only focusing on yourself. In this trader community a lot of people like to show how much profit they made. Instead of comparing your success against theirs, it’s good to really communicate with them, to see what mistakes they’ve made and how to deal with them. But their profits and losses shouldn’t affect you or your mentality of how you’re supposed to trade. You shouldn’t let peer pressure make you feel like you are forced to make a trade.