Why you have not made money trading, yet. (Preview)

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Trading is so alluring with the dangling carrot of financial freedom, a prize to good to give up on. I say this because working within the financial industry and specifically for a brokerage, I know the statistics and I have witnessed hundreds of client lose money when trading the financial markets.

You might have heard that the Forex industry stat of 90:90:90 meaning that 90% of retail traders lose 90% of their initial deposit within 90 days and while this is drastic, it is not too far from the truth. For all of you that love a conspiracy theory and believe that the broker is out to get you, I can tell you that while occasionally some broker do play dirty tricks like slipping you on trade entry, the broker cannot move the financial markets and are not the reason most traders don’t make money. They simply take advantage of this statistical fact because it is more profitable venture for them.

So why have you not made money trading yet?

Well, I am going to present to you some solid facts in an attempt to open your eyes a little wider and support your trading.

Expectation of return

When trading it is logical to walk on the side of caution and you will have learnt quickly the importance of risk management. When you dig a little deeper into your understanding of risk management you will have likely have stumbled across what is call the “risk to reward” ratio. When considering your odds of making money trading, a good risk to reward ratio is 3:1, risking 1% to make a 3% return for example. This means you only need to call your trades right 33% of the time which should be easy enough to achieve. What might not be so easy to achieve is actually hitting your trading target.

People have a tendency to tell the market how much they want it to move in a particular direction when placing their take profits. Your strategy will setup nicely and you proceed to execute your trading with the hope that price will your take profit. Two things can happen at this point, price proceeds to hit your take profit or it runs against you and hits your stop loss.

One of the reasons you may not be making money trading is down the fact that your average risk to reward ratio is typically 1:1 because you want to make a quick buck while not risking too much on your trading capital. Statistically you need to call 50% of your trades right just to breakeven and when you can call 50%+ of your trades correctly, consider yourself a good trader (assuming you can trade correctly). I say 50% to breakeven however this number does not consider the cost of getting in and out of a trade, or the financing costs if you are leveraging your position size in the market. Statistically, the odds are stacked against you with a poor risk to reward ratio.

Another reason you may not be making money trading is because you do have a good risk to reward ratio in place but you profit target is essentially a request for the market to break away from normality and spike favourably in your direction. Most retail traders are do not consider the average volatility of the financial market they are trading or have an awareness about the probability of price moving as much as they need it to, in order for profit targets to be hit.

Have you ever placed a trade and price has just moved against you, almost like your stop loss was a magnet? I’ll bet price then decided to retrace and move in line with the original direction you anticipated it moving. This typically happen to day traders because of stop losses being placed within the average daily volatility of whatever financial market is being traded. All traders should have an awareness of how much volatility to expect when trading because it is volatility that creates the opportunity to profit from both rising and falling markets.

 

Information overload

If I had to guess, I would guesstimate that approximately 98% of financial news will not support trading decisions. Everything you read in the papers and on websites can be considered old news. I realise this is quite a bold statement but know that as a trader, your objective is to predict the where the financial markets are going to go so you can profit from price movements. Most financial headlines will not support your cause here. As great as that might be to hear (or not), financial news can do a pretty great job of confusing you and throwing off your trade decisions if you let it.

There are also a million and one ways to approach trading the financial markets so if you have spent five minutes learning a strategy and not seen instant results when implement the approach it is too easy for you to begin your quest for the “holly grain” and hop from one trading strategy to another. Consistency with your trading strategy is definitely a contributing factor to your long term success.

On top of the vast number of trading strategies that will get the better of your curiosity, there are all the bells and whistles available to luring you into trading like a “professional”. Know that you do not need an exceptionally cool looking platform that has a countdown timer for upcoming economic news event to find success with trading. These trading tools only make for a great distraction from what really matters, generating good trade ideas and good market entry/exit timing. A trading platform is simply for trade execution so hoping from one broker to another to test their platform and trading tools probably won’t benefit your trading a great deal. Sure good trade execution is what you want to get but when looking at the big picture, saving a little money on trading costs is not what is going to make you a good trader, it is not what will make you money trading. It is all about your approach to trading the financial markets which is what this website is all about.

You will find a lot of great content here that you can use to really develop your ability to make money trading.

If you have yet to sign up, signup for free and read the next lesson now called “Understanding the big picture

 

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