Why day traders fail boils down to at least 16 reasons. This article explains why day traders fail and what you can do to survive and perhaps even prosper.
Why day traders fail is mainly because they don’t understand the ecology of the markets, have no game plan, trade too big, and don’t know their risk tolerance.
Day trading certainly holds promises of a fast-paced working environment with high returns. Its allure proves practically irresistible to many new traders. It is also a common belief that most day traders don’t make much money, and many more are even confronted with the possibility of losing their trading deposits in a single year. This begs the question:
The Shocking Reality Behind Trading Failures
Have you ever heard that “95% of traders fail”? This trading statistic gets thrown around all over the internet, but guess what? There’s actually no research paper that confirms this exact number The truth might be even more disturbing – research suggests the failure rate is much higher!
I’ve been studying trading patterns for years, and the statistics from actual broker data paint a pretty grim picture. Let me share what scientists and economic researchers have discovered about why most traders lose money and quit before achieving success.
The Brutal Statistics About Trading Failure
Let’s look at the cold, hard facts about trading failure rates:
- 80% of day traders quit within just two years
- Nearly 40% of people who start day trading quit after just one month
- Only 13% continue day trading after three years
- After five years, a mere 7% of traders remain in the game
- Only about 1.6% of all day traders are consistently profitable in an average year
These numbers are pretty shocking, right? But they’re backed by research analyzing real broker data The question is why do so many traders crash and burn?
The Psychology Behind Trading Failures
The Lottery Mindset
Many traders approach the market like it’s a lottery ticket Research shows
- Poor individuals spend a greater percentage of their income on lottery-type investments
- People with bigger gaps between their current financial situation and their aspirations take bigger risks
- Men trade more frequently than women (and unmarried men trade even more than married ones)
- Young men from urban areas and specific minority groups invest more heavily in high-risk “lottery-type” stocks
- Within each income bracket, those with gambling tendencies consistently underperform non-gamblers
I’ve seen this mindset destroy many trading accounts. People come into trading thinking they’ll get rich quick, but the market quickly humbles them.
The Disposition Effect
One of the most damaging psychological biases is the disposition effect – the tendency to:
- Sell winners 50% faster than losers (60% of sales are winning trades, while 40% are losing trades)
- Hold onto losing investments while quickly selling winning ones
- Repurchase stocks they previously sold for a profit more readily than those sold at a loss
This behavior is like taking one step forward and two steps back. It’s literally the opposite of what successful trading requires!
Performance Issues That Plague Most Traders
The performance data is equally troubling:
- The average individual investor underperforms market indexes by 1.5% annually
- Active traders do even worse, underperforming by a staggering 6.5% per year
- The average day trader loses a considerable amount after accounting for transaction costs
- In Taiwan, individual investor losses amount to approximately 2% of the entire GDP!
Why Traders Continue Despite Losses
Perhaps the most puzzling statistic is that traders with up to 10 years of negative results continue trading. This suggests many traders persist even when they receive clear signals about their lack of ability.
Other concerning patterns:
- Traders don’t effectively learn from trading experience – “trading to learn” isn’t more rational than “playing roulette to learn”
- Individual investors trade more actively when their most recent trades were successful (overconfidence bias)
- Many investors overweight stocks in industries where they work (familiarity bias)
What Successful Traders Do Differently
While most traders fail, that small 1-1.6% of consistently profitable traders share some common traits:
- They make up only a tiny portion of all traders but account for about 12% of all day trading activity
- Profitable traders increase their trading activity more than unprofitable ones
- Traders with strong past performance tend to continue earning strong returns
- Higher-IQ traders tend to hold more mutual funds and a larger number of stocks, benefiting from diversification
The Real Reason Most Traders Fail
After reviewing all these statistics, it becomes pretty clear why so many traders fail. Trading decisions are rarely based on:
- Sound research
- Tested trading methods
- Proper trading journal analysis
Instead, most failing traders make decisions based on:
- Emotions
- The need for entertainment
- The hope of making quick fortune
What many don’t realize is that trading is a profession requiring skills developed over years, not months. It’s not a get-rich-quick scheme!
How to Avoid Becoming Another Failure Statistic
If you’re serious about not becoming part of the 98.4% of unprofitable traders, here are some essential steps:
1. Develop a Trading Plan and Stick to It
Having a well-defined trading plan with clear entry and exit rules helps remove emotional decision-making.
2. Keep a Detailed Trading Journal
I can’t stress this enough – tracking and analyzing your trades is crucial for improvement. A proper trading journal helps you:
- Identify patterns in your trading
- Recognize your psychological weaknesses
- Track your progress objectively
3. Focus on Risk Management
Many failing traders focus solely on profits while ignoring risk management. Successful traders know that protecting capital is priority #1.
4. Have Realistic Expectations
Don’t expect to be a millionaire by year’s end. Trading is a marathon, not a sprint. Set realistic goals that build over time.
5. Educate Yourself Continuously
Markets evolve, and so should you. Commit to ongoing education about markets, strategies, and trading psychology.
A Personal Note on Trading Success
We at our company built our trading journal tool specifically to help traders overcome these common pitfalls. A proper trading journal is one of the most powerful ways to become a professional trader and start taking your trading seriously.
I’ve seen countless traders transform their results simply by becoming more self-aware through proper journaling and analysis. The difference between the 1.6% who succeed and the rest isn’t necessarily intelligence or resources – it’s discipline, patience, and proper process.
The statistics don’t lie – most traders fail. But understanding why they fail gives you a roadmap to avoid the same pitfalls. Remember that trading is a profession requiring dedication, not a lottery ticket to instant wealth.
Be mindful of your trading decisions and your perspective on trading. Don’t expect overnight success, but keep in mind the real possibilities that online trading offers when approached professionally.
Are you ready to be part of the small percentage that succeeds, or will you become another statistic? The choice – and the work involved – is entirely up to you.
Have you been struggling with your trading performance? What steps are you taking to avoid becoming another trading failure statistic? I’d love to hear your thoughts!
Reason 13: Survival is ignored
Let’s face it, many are attracted to trading because it offers the opportunity to get rich quickly. Unfortunately, it also provides a chance to get rid of your money. But trading is about surviving – protecting your capital and ensuring you can return to the battlefield the next day. You are unlikely to survive if you allocate 15-25% of your capital on each trade. A few losers make sure you are unable to recover.
Losses need to grow geometrically to recoup. A 25% loss requires a 33% return to return to break-even. If you lose 50%, you need to make 100% to recover. Very few traders can recover after losses.
A 15-20% return on capital (unleveraged) is something hardly anyone can manage or sustain over many years. Only systematic and rational traders can accomplish that, or perhaps fortunate ones (never underestimate the role of chance and luck).
Reason 3: A day trader needs a trading plan to avoid failing
Regardless of your trading style, having a trading plan will prove to be the key to your success because day trading requires both foresight and strategy. Once you look at day trading as a day job, you’ll realize the importance of having a trading plan in advance and avoiding the common issues experienced by new traders: not having a real game plan for what and where to buy.
Your trading plan should cover every aspect of the trading process. You must know which market you want to trade, which strategy you want to use, and what kind of trade management technique to use. It would help if you also considered which time frames to use, be it 15 or 30 minutes to an hour, perhaps testing strategies outside the regular trading hours. You should also have determined a proper position and have clearly defined risk parameters.
And please make sure you have a trading journal where you record all your trades – we have provided you with a trading journal example. Trading records are essential. Why? We have not researched ourselves because humans form beliefs and believe in all sorts of things. If you read something in the paper or talk to someone you trust, your default is to believe what you hear and see. Trading records debunk a lot of those beliefs. By quantifying, you learn and adapt.
Good decisions compound. Even small decisions today, which might hardly be noticeable, can make a huge difference 10-20 years ahead. Improving decision quality is what trading is all about. A ship one degree off course is not noticeable over short distances, but when crossing the Pacific Ocean you end up way off your destination.
Why Most Traders Fail? – What 90% of Traders Do Wrong with Risk and Profits | Jesse Livermore
FAQ
Why do 90% of traders lose?
The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.
Why do most traders never succeed?
Most traders fail because they lack a solid strategy, underestimate risk management, and let emotions dictate their decisions. Instead of focusing on consistency, they chase quick profits, which leads to impulsive mistakes. The key isn’t just finding good trades–it’s managing the bad ones.
What is the 90% rule in trading?
The Rule of 90 is a grim statistic that serves as a sobering reminder of the difficulty of trading. According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
What is the 1% rule for traders?
The 1% rule demands that traders never risk more than 1% of their total account value on a single trade. In a $10,000 account, that doesn’t mean you can only invest $100. It means you shouldn’t lose more than $100 on a single trade.