So Why Do Most Traders Lose?

The three obvious reasons why most people won’t follow the new rules

First, most people think that trading is easy.  You open up an account, get some buy recommendations and hold on, hoping to make a fortune.   And if some authority says buy XYZ, do it without question.   I don’t know whether is still occurs by around 1989 I remember the vice president of a large brokerage firm telling me that most of their buy recommendations were the stock that their firm wanted to unload.   As a result, they sold them to their customers.

Most people will follow such advise and not pay any attention to learning how to trade really well.  Start with the Supertrader Fundamental Courses will get you off to the right start as will reading our free book, Trading Beyond the Matrix.

The second reason most people lose is that they trade their beliefs and emotions and this causes them to make mistakes.   Many traders make 3-5 mistakes every 10 trades.   This means their trading efficiency is between 70 and 50%.

I define a mistake as not following your written trading rules and if you don’t have such rules then everything you do is a mistake.   And if you are a perfectionist and want to be right about your trades, then put your perfectionism into trading mistake free.  Trade at 100% efficiency if you can.

Every mistake as an average R cost.   Let’s say it is 2R.   If you make three mistakes in 10 trades then in our sample system, you have wiped out your potential 6R gain.   If you make five mistakes then our net result is now -4R for your ten trades.

And if you decide to keep track of your mistakes, it’s likely that your efficiency is not any better than 70%.   As a result, in our Super Trader program, we emphasize avoiding mistakes and this can make a huge difference in profitability.

This one tip alone could save you a lot of money.   A mistake is not following your rules.  So have written rules to guide your trading and then make sure that you follow them.

The third reason most people cannot make good profits in the market is that they don’t realize there are at least six market types.   In 1999, I got to a restaurant and the waiter would tell me this job was part-time, his real job was making money trading.   All of those people found out the hard way that what works in a strong bull market does not work in a market.

There are at least six different market types’

  • Bull (Up) quiet
  • Bull Volatile
  • Sideways Quiet
  • Sideways Volatile
  • Bear (Down) Quiet
  • Bear Volatile

Another one of our Tharp Think principles is that it is easy to design a great system for any one market type, but it is insane to expect that system to work in all market types.   This should be obvious to everyone, but it’s not what big money wants you to believe.    They tell you to leave your money alone.  If you take it out during a bear market, it won’t be working for you, even though the way they trade your money might not be working.

If you can just understand the principles of this lesson and incorporate them, you should do very well as a trader.  But for most of you, it requires a lot of inner work to become 100% efficient as a trader.

What the rules seem to have in common is (1) a statistical approach to markets that (2) relies on thinking about reward-to risk rather than being right. They also emphasize that great performance is a function of what the market gives you, your system, and you, as shown in the diagram below where the three circles intersect.

Stay Aligned

Can you see how the “old rules” that everyone seems to learn
can lead to disaster, while the second set of rules is a major transformation
of the trading game and can lead to success? What would it be like if you concentrated on making multiples of what you risked? Consider the story of one Super Trader in the next lesson.

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