That said, in order to break from the herd there are a lot of things that must be known about yourself, human tendencies and how these combine to form societal movements which the stock market reflects. This article will show that what you believe may be your own path may be the exact thing which is keeping you a part of the herd, and thus always entering and exiting the market at the wrong time.
All sorts of reasons are given for it, such as money management mishaps, bad timing, bad government policy, poor regulation or a poor strategy. A deeper reason as to why most traders will lose regardless of what methods they employ.
You have no idea what the market is doing your eyes are still closed , but you begin to react to your action—you wonder if you made the right decision, if you should adjust your stop loss or if you should have gotten in earlier or later.
Even seasoned traders can go through these emotions at times. Most traders seem to think of the market is something that has some external value outside of the price attributed to it by traders.
Everyone making money means there is no market, because who would be taking the other side of the trade? In addition, most traders feel they can move with the crowd to make a paper profit, and then get out before the crowd, turning that trade into a real profit.
In theory this is sound, but remember everyone else is setting out to do the same thing. It is this crowd movement which allows traders to make money at times. Without a large portion of traders coming to the same decision markets simply would not move. Stop loss orders would trigger all over the place and prices would inflate and deflate… just as they do now with people adhering to their own and different types of strategies!
The attempt of the masses to avoid this or to created profits creates the very noose they end up hanging themselves with. Successful traders find something that works and stick to it, not letting others pull them away from their strategy. This is where most traders go wrong and why the crowd loses money.
And heaven forbid you are right and people hate you because you just made money while they lost their shirt. Or the manager who is resented for getting to keep his job while several of his employees are laid off. This could largely be due to the human tendency to Extrapolate Trends. Because they invest and pull out their funds at the wrong points, just as they do in the market see brief video at the end of this article. Also realize, everyone sets out to be an individual and trade their own way, and by doing so most end up being with the crowd that loses money remember Master Oogway.
Because each person lets it happen.. It is no mistake that individuals begin to like the same sorts of fashions that everyone is wearing. In a quest to change, the majority of society ends up changing together, moving towards similar desires and away from similar dislikes.
Therefore, what the market is offering provides the exact thing that will lure the trader into the crowd. While it may be starting to come clear, you may still wonder how it is possible most people lose money and how they seem to join the crowd at exactly the wrong time.
So people buy and buy and buy, and then other people see this and buy and buy and buy. Some still hold out and the market keeps ticking higher. People are proclaiming their achievements and chanting that boom and bust cycles are a thing of the past.
The chart below shows this in a slightly different way. The market is unlikely to reverse to any significant degree until almost everyone is on one side. Which means almost everyone who joined that party late is going to lose.
A bunch of people may just decide to wait, but so will the market. And if people are divided then the market will move in a ranging fashion. In other words, the boom and bust cycles will not end.
We progress and regress and then progress again. Attempting to legislate the boom and bust cycles away is nothing more than political pandering, and is the result of the same mental processes which creates booms and busts in the first place. This can be further simplified by saying that my own productivity is largely determined by my overall mood.
If I feel good I work hard, play hard and buy stocks. This applies to almost everyone and while individual experiences vary, on a societal level it plays out in the same way. And as the mood of society continues to grow darker people feel more hopeless and give up fanciful notions of making money with assets and so the assets continue to drop. People then blame and pick fights with others because of their misfortune…blaming politicians and successful traders who have no more control over the situation than anyone else.
What are the odds Probabilities in Trading are calculated wrong? The reversal then reaches a bearish extreme where people see no hope, but there are still shares out there and gold to buy and so a few start to buy and the whole process starts again creating waves of smaller and larger degrees across time. But it is not the professional money manager showing their ignorance, it is these critics who understand nothing about market movements.
The majority of investors and traders will not beat the benchmark because they themselves create and are a part of that benchmark! Certain traders do manage to outperform consistently.
Many traders and novice investors come to markets with a handful of bills and then lose it. There is a steady and continual stream of these people. They feed the kitties of those traders that are successful. Since most traders trade on a shorter time frame than investors, consider this example. Most traders will be very near flat and then deduct fees and they are in the hole. Consistent losers will drop off, contributing to the large number of traders who lose money.
In order for the glory stories to happen.. Look at it a different way. Someone lost money giving it to this successful trader or gave up profits allowing the successful trader to profit. In other words, the very thing which lures people in droves to the markets big returns ironically means that most of those people will be on the losing end of that exchange.
In another ironic twist, when people clamor into the market all at once out of greed and a belief that a new era has begun, they bring about the exact opposite.
Only the few who understand this concept, who accept that what feels natural and good is likely the wrong choice, may manage to make money at this game. While this article provides a broad context, it applies to the small scale as well. Buyers and sellers can get exhausted, elated or sedate on any time frame.
In my opinion, there were some major advances in technology during that time which could potentially do a lot of good, and thus the rise was warranted.
These major fundamental shifts do no occur often, which means that in the lulls between most traders and investors will lose money. The bottom line is that traders must stick to a well-defined plan and trade that plan even when it is uncomfortable and it often will be. The vast majority of the population, and thus the vast majority of traders, buckle under this uncomfortable pressure…the same way they reach for the chocolate bar instead of the carrots.
As promised, here is that short video on how hedge fund investors usually get in and out at the wrong time, even when the hedge fund is successful. Its like central banks sucking out liquidity from the markets. The people who run casinos stock market are forming indirectly government. Money is just their consent. Whatever they sign now digitally becomes money.
This is a different perspective. Forex trading to me needs someone who is emotionally balanced, resilient towards risk you must be able to deal with losses at times and keep a clear head even in your winners, dedicate yourself towards educating and improving your edge in trading. In conclusion trading is not really for everyone, but if you can stay committed, get a mentor, keep yourself motivated, read self-development books and believe in yourself and you can surely make it in the FX market.
Focus on making yourself a skilled trader, paper trade, dont underestimate demo trading, practice until you see that you can now consistently make profits month-to-month. Once you have the skill, money will naturally flow in your trading account — and personal bank account! Unfortunately the statement here is non-specific and gives no strategy on how to do anything. The only take away I get is avoid the herd mentality by: Trevor — would you be willing to email with me a little?
I am a fledgling ForEx trader who is quickly dying on the proverbial vine and I need some help and assistance. Cory well said and written about why most traders lose money. I am not a trader yet but really fascinated and challenged that there is money to be made in trading. The object of trading is to make money right? But why with all these gurus and technological presentations etc still I believe missing the point except of what I read from you.
You hit the right button. I am 68 years retired and made most of my money following a simple rule other than my 3 pensions. Show me strategy when to buy wholesale and sell retail in trading with everything factored in, I can make a living or earn an extra income for life. I am just a simple and uncomplicated minded person. Sure will enjoyed more if I had known trading 20 years ago.
Happy new year and a Happy profitable trading to all. Cory, I stumbled onto this page while looking for a figure as to what percent of the investing population trades Futures, for a book I am writing. No luck finding that number, but I do sometimes like reading articles that people post about making money trading.
Usually I find humor in the comments of false prophets suggesting they can show you how to make money. I started reading your article and have to say kudos to you for speaking honestly. Friends ask me regularly how to make money, and I always inform them not even to try.
Just invest, watch your tax efficiency, as expenses and gains are one and the same, and over time hope for the best. One thing I do disagree with though is your comment on statistical aberrations. It is incorrect as a function of the time interval you are using being 1 year intervals. An active professional trader can be reviewed each year on performance of intervals, average and standard deviation. Over my career that gives me several thousand data points.More...