I guess it’s okay to lose money from trading if it’s just a hobby, like playing golf, or hill walking, and you’re enjoying the process, so not too worried about your handicap decreasing, or if you’re reaching ever-higher mountain peaks.
But most of us have turned to trading because we want to be successful at it. Maybe to give us financial freedom … a better lifestyle for ourselves and our families … or just to prove that we CAN do it.
So, even if you’re not carefully tracking your bottom line, you’ll know if your account levels are always heading downward, or how many times you’ve had to ‘top up’ after a losing run …
In which case, you’re likely to be asking yourself, ‘Why do I keep losing?’
1. Why do I keep losing?
“I just haven’t found a profitable system yet”
If your email inbox is anything like mine, I expect you receive frequent offers of fantastic trading systems promising to end any money-woes forever.
It’s inevitable that choosing between these to find ones that really work can be tough. But it’s not impossible.
First off, let’s look at the categories these ‘fantastic’ trading systems can fall into:
- absolute rubbish that doesn’t work
- works, but with very volatile returns, so there will be lengthy and uncomfortable periods of drawdown
- works, with manageable drawdowns
- works day in, day out, never taking any losses.
(Just so you know, category 4 doesn’t exist – every trading system will have losses along the way.)
That leaves us with categories 1–3 to filter between.
Category 1: filtering out the absolute rubbish that doesn’t work
The best way to ensure you’re not buying into category 1 is to buy from a reputable source – someone with a good reputation, who’s been around a while. Also, look at the trading results they’re posting – do they look genuine and realistic? Don’t be afraid to ask a few awkward questions. Anyone who’s unwilling to answer your questions (however basic) should be given a wide berth.
I strongly recommend looking at the ‘strategies I’m using’ section of the Trader’s Bulletin website – all of these systems have a solid track record, and if you’d like any advice on which is best for you, please just drop me a line.
Categories 2&3: Finding a volatility that’s right for you
The difference between categories 2 and 3 will depend on your own attitude to risk, how much of a drawdown you can stomach, and what the size of your trading fund is.
The truism about drawdowns is that your biggest drawdown is always to come! Unfortunately, it’s a fact of trading that profits will go down as well as up, and the longer you trade for, the more of these losing periods you’ll have to navigate. What’s vital is that you’re prepared for them, so you don’t lose too much money, or too much of your will to keep trading!
Looking through a track record can’t give you an accurate prediction of what drawdowns are ahead, but it can give you an idea of volatility – the easiest systems to trade have nice, smooth profit curves (even if they aren’t the steepest).
It is possible to affect the volatility of your returns by the way you stake. By risking less per trade, you can reduce the volatility of your profit curve (yes, your profits will be smaller too, but you won’t have those gut-wrenching losing runs to suffer).
Let’s say that you’ve a trading fund of £10k … your first month of trading, you take a 10% loss (that’s – £1,000) … second month of trading, you make an 15% gain, bringing your bank size back up to £10,350 (3.5% profit in 2 months).
But if that £1,000 loss is too uncomfortable, you could trade with a smaller risk. Half your stakes, and your loss in the first month would instead have been £500. Come the second month that would be topped up to £10,213 (over 2% profit in 2 months).
You’ve halved your risk, but you haven’t halved your profits – that’s the great thing about reducing volatility! It’s a win-win.
So, the questions to ask yourself about a trading system are:
- Do I trust its source?
- Do I trust the results I’ve been shown?
- Are those results too volatile for me?
- Is there a way I can reduce volatility if the ride gets too rough (like cutting stake size)?
Of course, I’ve assumed here that you’re buying a trading system rather than building your own, but the same factors apply when evaluating your own results.
If you aren’t happy with the way your trading system is performing, please be wary of jumping ship. As we saw last week system-hopping is one of the surest ways to lose money on the markets over the long term.
2. Why do I keep losing?
“My system works on paper, but I seem to miss the best trades, and stake too high on the bad trades”
The problem of missing the best trades has two potential causes:
- Either you need to be more disciplined in your trading
- Or, the ‘on paper’ results your system is showing are unachievable in the real world (because it’s just not possible to execute trades fast enough, for example)
The heart of the problem is often a combination of the above. Perhaps the trading method you’re trying to follow just doesn’t suit your lifestyle. Does it require you to be up a 6am every day? Or sneaking peeks at charts during the day, hoping that your boss doesn’t notice? There are plenty of systems out there, to suit different lifestyles. There’s no need to be looking through charts for hours out of your day (unless you like that kind of thing) – often the best trading systems are more hands-off, as that means less emotion and less chances of ‘fiddling’ with trades.
Getting stakes wrong … well, there’s no excuse for this. If you’re still doing this – then it’s straight to the naughty corner. It’s dead simple to calculate your stakes per trade, based on your fund size and your risk profile – if you’re in any doubt about it, please download my position-size calculator HERE
3. Why do I keep losing?
“I don’t yet have the confidence, funds, time to get properly started …”
Well, if you’re skeptical, cash-strapped, time-poor … or all three … there’s good news.
As I mentioned above, good trading doesn’t require a lot of your time. Commitment yes, but if you can only manage a few minutes a week (HAV Trading), or month (PIE Trading) – that’s fine. Just decide what time you can spare, and stick with it.
Channel your skepticism into a healthy caution in trading … look critically at trading results, demo trade before you commit any funds, and start with small stakes, building your wealth steadily. Yes, some trading methods require large funds in order to manage long-term trades with wide stop distances – but not all do. There are plenty of “ways in” for very small funds – I recommend looking at Heikin Ashi Mountain and Diff Code Transatlantic, all of which can be set up with small funds. Or, if you want to keep risk levels really small, Rainbow’s End has the best risk-reward profile I know of.
4. Why do I keep losing?
“I just don’t know what I’m doing wrong, but I always seem worse off at the end of the month”
The first step to getting on the right road is to have a plan … and to stick with it.
Anyone who thinks they can ‘wing it’ and do well is deluding themselves – trading goes against all our natural human instincts (to take profits, wait for losses to come good, take bigger risks according to how we feel that day). Which is why all traders need rules.
And the combination of clear rules with a track record allows us to pin-point where things might be going wrong – so we can fix them.
Turning things around
Whatever the reasons behind a lack of success in trading, we can turn things around for a profitable future.
The key component to that is your trading strategy.
If you have your own system, or want to develop one, there’s a stack of information on this website, and across the internet. My advice would be to concentrate on trade management, rather than getting bogged down in ever-more-complex signals and indicators.
If you want a system that’s going to work for you ‘out of the box’ then I can hand-on-heart put my name behind any of the ‘strategies I’m using’ – these are methods I’ve tried and tested for years. Of course, there is plenty more out there – but please look at track records carefully, and consider:
• volatility of return (i.e. how big the drawdowns could be)
• how much capital is required (i.e. can you run this with low stakes if necessary)
• how much time is required (will it fit with your lifestyle)
All those considerations are more important than a juicy big end-of-year profit figure. Of course, the strategy needs to be profitable, but as long as it has the all-important ‘edge’ over the market – you know you can make money with it.
Please use the comments section below to share any specific problems you’ve encountered, or to let me know of issues I haven’t covered above. I’m absolutely determined to make Trader’s Bulletin a hub of highly successful traders – and a place where newbies can come and get off to a really positive start.
I look forward to hearing more of your stories.
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