Trading Psychology: Rewire Your Brain for Maximum Performance in Today’s Markets
By Scott Redler
Chapter 2: 13 Reasons Why Traders Fail
"A negative mind will never give you a positive life."
What is your goal as a trader? To make $1,000 a month? $1 million a year? I don’t care how big or small goals are, one thing is true: to win big, you have to start by… not losing. You have to start by avoiding the most common reasons for failing as a trader.
So let’s go through 13 reasons traders fail to make money. As I explain at the end of this chapter, each reason is psychological in nature.
Reason for Failing #1: You Don’t Have a Trading Methodology That Matches Your Personality
What is a methodology? It’s a system for analyzing opportunities. It’s a set of tactics for buying and selling stocks, options, futures, cryptocurrencies, or whatever else you trade. If you’re buying and selling at random, you’re going to fail. But you knew that, right?
It is critical to find a methodology-personality fit. You have to find a system that augments your strengths and minimizes your weaknesses.
Two traders can use the exact same system and have very different results. Why is that? Because the more your method fits your personality, the more likely you are to follow it and succeed.
Humans are not algorithms. We can’t just buy and sell without feeling any conflict. So our system has to resonate with us. That’s the only way we’ll go along with it.
And if your system does not fit your personality, you can probably guess what happens. You feel stress. Anxiety. Confusion. And then you start straying from it.
I like to call myself a “cocktail napkin technician.” That means I value simplicity. My trading system is focused on identifying the trend and riding it as hard as I can. Everything else is secondary to my trend analysis core.
Reason for Failing #2: You Don’t Want to Work Hard
One of the recurring themes in this book is that there is no guarantee of success in trading. And to give yourself the best chance of winning, you must put in a lot of time and effort.
There is no substitute for sitting down and working hard for years to master your craft. I call that “seat time.” Literally, the amount of time your butt is in your seat trading and studying.
That’s the reality of anything worth doing in life, and it’s where true confidence comes from. Don't just take it from me. Listen to Kobe Bryant:
If the idea of putting your head down and grinding away really turns you off, you are already disadvantaged from a psychological perspective.
Reason for Failing #3: You Take Too Much Risk
In trading, we get rewarded for taking the right risks at the right times. But many traders are convinced they’re just one huge trade away from buying a new car or paying the kids’ college tuition. So they play two ways: big, or not at all.
But when you chase a large reward, you also take a lot of risk. When the market goes your way, taking more risk actually pays off. So you feel more and more confident. But the minute things go wrong, you get wiped out.
It's very easy to go on a 6-month winning streak, only to give up all the gains in a week or two. Why? Because when you’re addicted to big rewards, the concept of risk management goes out the window.
Reason for Failing #4: You Take Too Little Risk
There’s another side to the risk-reward equation. If you don’t take enough risk, you will never get rewarded. And what does insufficient risk taking look like? Taking overly small positions, or not trading often enough.
Sometimes you need to push yourself out of your comfort zone, and get more aggressive. If you can’t ever do that, you may not be mentally up for the risks of trading.
Reason #5 for Failing: You Can’t Admit You Were Wrong
Traders like to be right. I know I do. But thousands of times a year, I have to admit I was wrong. I have to stop out of a trade because it went wrong, and I need to cut my losses.
You might be shocked at how much damage just one or two runaway bad trades can do to your overall P&L.
So you must stand by at all times to hit the eject button and abandon a bad trade before it’s too late. Losing $500 on a trade stinks. But losing $50,000 is way worse, especially when you realize you could have gotten out at that $500 loss mark.
Reason #6 for Failing: You Talk Yourself Out of Market Uptrends
You just learned how exiting a bad trade can hurt. Selling too early can also cause you big problems.
This is most common during market uptrends. The S&P 500 will be trending above the 8 & 21 day moving averages with tech stocks and small caps leading the way (my kind of market). Yet many traders will sell strong stocks under the belief that “what goes up must come down, ” or because of economic and political news.
Remember the 2017 North Korea Missile scare? That turned out to be a massive buying opportunity:
Don't fall victim to sensationalism. There's a long list of doomsday callers that are always wrong.
Reason #7 for Failing: You Have Personal Issues or Health Problems
Life is a wonderful ride… but it’s not always a smooth one. We all have problems related to family, friends, and health.
And they are going to impact how much money we make trading. Imagine if you were going through a divorce, or if you had a heart attack, or if your daughter was in the hospital with cancer.
If you think life changes and events won’t impact your trading, you are in for a rude awakening.
Reason #8 for Failing: You Are Not Measuring Your Trading
It’s common for a trader to have no real knowledge of their numbers aside from their account balance and overall P&L.
It’s one thing to know that you were up $20,000 last month. But do you know exactly which stocks drove that gain? Which strategies? And do you know what failures prevented you from gaining $25,000 or $30,000? You must know what is actually pushing your P&L up and down to make progress.
We talk more about this later in the book.
Reason #9 for Failing: You Have No Daily Routine
Regardless of strategy or personality type, successful traders tend to be process and routine-oriented.
Winners tend to do the same things over and over again, and never get tired of them. When you are focused in this manner, you can direct your time and energy where it matters: in making decisions about your trading.
What’s kept me in the game since 1998? I’ve been focused on executing the right daily process since 1998.
If you have no structure in your trading, things will always feel chaotic, and you’ll feel drained because you have to make too many decisions. This is another major topic we’ll discuss later.
Reason #10 for Failing: You Have Not Taken Responsibility for Your Results
At times, it can feel like the world is conspiring to make you lose money in the market. You buy a stock only to see the company guide down 10 minutes later. Your computer freezes in the middle of executing a trade and you miss out on a huge gain.
But you have to take full ownership of everything good and bad that happens to you. Otherwise, you have nothing but an expensive hobby. Only when you assume responsibility for your results can you move forward with confidence.
And let’s get real. You can’t claim credit for a $10,000 win if you blame all your losses on the Fed or hedge funds or Jim Cramer or Elon Musk or anyone else.
"You can’t claim credit for a $10,000 win if you blame all your losses on the Fed or @jimcramer." #tradingpsychology
Reason #11 for Failing: You Are Too Negative
My favorite quote ever is “A negative mind will never give you a positive life,” from Ziad Abdelnour.
Choosing to be positive can have a massive impact on your chances of achieving your goals, no matter what you want to do.
Trading is not easy. You have no guarantee of success. So you might think I’m a pessimistic person. Nothing could be further from the truth. I simply choose to view life with a “glass half full” point of view.
And if you look at a long-term chart of the SPX, you probably know why that makes sense:
Reason #12 for Failing: You Stop Doing What Works
Even when you are making a lot of money, you can fall into the trap of trying new things out of boredom, or because you think the grass is greener on the other side.
But if you are fortunate and hardworking enough to find a system that works well for you, resist the temptation to complicate things by adding new patterns, indicators, and asset classes to the mix. You are almost guaranteed to get better results from building on your strengths than adding more parts to the machine.
Reason #13 for Failing: You Think You Have to Be Perfect to Make Money
I have flaws. I have a limited attention span. I can be very superstitious. Sometimes I am way too risk-averse. I’m not great at shorting.
And once in a while, I even break my own “unbreakable” trading rules. Yet, I’ve made a great living as a trader since 1998, and I’ve given my family a nice life in a beautiful town.
You do not have to be perfect to succeed.
And in fact, in the next chapter, we will destroy the myth of the “rational” trader.
What Makes All These Reasons Psychological?
All 13 of the reasons why traders fail are psychological in nature. Even “You Don’t Have a Trading Methodology That Matches Your Personality” and “You Don’t Want to Work Hard” are psychological in nature when you think about them. Because they are just another way of saying “I plan to self-destruct because I don’t think I can do this.”
Today's Action Item: Write Down Why You have Not Succeeded
Write 150 words detailing why you believe you have not achieved your trading goals. And identify which of the 13 reasons listed above is impacting you.
Preface: Intro to the Book
Chapter 1: How to Get the Most Out of This Book
Chapter 2: 13 Reasons Why Traders Fail
Chapter 3: Why Rational Traders Don't ExistChapter 4: The Myth of the Consistent Trader
Chapter 5: Trading Ain't Easy
Chapter 7: Get Obsessed With Price Action
Chapter 8: Why You Need Loss Limits
Chapter 9: Why You Need a Daily Routine You Love
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