Why Day Traders Fail

16 Reasons Why Day Traders Fail

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:

Table of contents:

How many day traders are losing money?

What percentage of day traders fail? Just a few day traders make profits, as most traders become the prey, instead of the predator. How many of them out there are losing money? There isn’t an exact answer, though likely no less than 90% will have fallen under that category, whereas only 1% are likely to be out there “making a killing”. Sadly, this also happens to make a lot of sense.

Day Trading Pitfalls

Why? Many day traders fail because they don’t understand how the markets work:

Reason 1: Day traders don’t understand the ecology of the markets

Due to its competitive nature, day trading could more or less be seen as a zero-sum game. The same thing happens in poker – not everyone is going to end up a winner. 

You must understand the market and its players first. Who are your rivals? Who are the predators?

Compare day trading to long-term investing. Since the end of the Second World War, the US Stock market has gone up 6-7% annually in real terms. And why is that? That’s because it is not a zero-sum game in the long term.

Companies earn money through increased profits and the US Treasury keeps on increasing the money supply. It’s hard NOT to make a decent return as long as you have a diversified portfolio. By simply being patient and building a stock portfolio, you’re increasing your profit chances.

Alas, this isn’t very exciting, and it won’t happen overnight. Most new traders can’t wait to make that first buck.

Reason 2: Few day traders use quantified strategies and thus fail

The main reason why most day traders fail is that they start day trading without a trading edge. A trading edge is more important than psychology and risk management. They’ll need an edge to succeed. Having a trading edge means that your trading setup has a higher possibility of success, which can translate into a greater than 50% chance win rate, or you make more from the winners than the losing trades.

Quantifying in day trading becomes even more important once we consider the sheer amount of noise and randomness.

Having a strategy for day trading often feels like a daunting task. Trading always takes uncertainty into account. All trading decisions have a financial impact. Therefore you need to find your own trading strategy. Your best option is to use a step-by-step approach to learning how to build a trading strategy that’s completely separate from discretionary trading.

Trading is all about making decisions based on an uncertain future. Trading decisions have financial consequences. Thus, it’s paramount to spend time developing structure and systems in your daily life as a trader. You have come a long way by quantifying your strategies, for example, by using a testing platform:

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.

Reason 4: Follow your passion -not money

Day trading is often defined by its scalability – its ability to make money fast. That is what attracts beginners, which honestly makes little sense. Without passion, you’re bound to lose. You must first love what you do and then detach yourself from the outcome.

Reason 5: Trade too big and you’ll fail

Another way to increase your losses is to trade position sizes that are too big for your account.

New traders usually do this as they attempt to increase their potential profits since the regular price movements in the intraday timeframe are seemingly too small to offer them any reasonable profit.

They’re missing the point. A single trade won’t be enough to increase their profits. Success always requires consistency which you achieve by building up some small, but frequent, profits over time.Day traders fail because they don’t understand their risk tolerance

Reason 6: Ignore your risk tolerance, and you’ll be negatively surprised

It’s important to understand your risk tolerance level. Day traders fail because they take too much risk – they are in a hurry to get rich. When they get a drawdown, they quit or abandon the strategy.

This is a lesson that beginners tend to learn through sheer experience. Why is that? One of the most important things in trading is to detach from money. That is difficult if you don’t understand your risk tolerance.

Trading too big, and you will most likely not follow the plan. How significant drawdowns can you suffer before you lose faith and give up?

Reason 7: Day traders fail because they are not patient

New traders rarely take their time to learn. They start trading believing that profits are made instantly in their pursuit to get rich quickly.

They want to start trading before even understanding the difference between a pullback and a trend. They barely have a grasp on market changes. It’s not uncommon to see new traders rush to bet their money in the market without knowing anything about the trading process. They still believe trading is an easily acquired skill. They’re not traders, they’re gamblers.

Trading requires more than just hard work, it also requires time, study, and numerous failed attempts before it ever becomes successful. Even after learning the basics, experienced traders still dedicate themselves to developing new strategies.

Reason 8: Do it for the thrill – and you’ll fail

Some day trade for the excitement, we believe the best stocks are the most boring stocks. While achieving success can be exhilarating, you can’t make money without preserving your capital. As Warren Buffet puts it, protecting your trading capital is the number one rule.

Not knowing when to close a losing trade can amplify a loss dramatically – a small loss grows into a big one. Losses make it harder to make a comeback. If you lose 50% of your capital, you need 100% to get back to even.

Reason 9: Day traders need to adapt constantly or end up failing

New day traders have a hard time adapting their strategies to an ever-changing market. They rather stick with whatever strategy that works for them, believing it will continue to do so indefinitely.But it won’t. All strategies at one point stop working.

But no single trading strategy lasts forever. Some are designed for a range-bound market and others for a trending market. As soon as market conditions change, a trader should be smart enough to choose a more favorable strategy. New traders would be wise to have more than a few uncorrelated techniques and strategies up their sleeves. You need to understand correlation in trading and how to mix strategies with different time frame, different markets, and different directions.

Reason 10: Lacking the mindset means you fail at day trading

Day trading is more than just creating strategies and developing criteria, it’s also about controlling your emotions and how they affect your trading. Hope, anger, despair can affect how your trading.

Moreover, we carry many trading biases with us. Loss aversion, anchoring, confirmation bias, “resulting”, etc. are just a few of them. We recommend reading Annie Duke’s Thinking In Bets to better understand how to make proper decisions.

Reason 11: Making trading complicated

It was Robert Pretcher who once said that most traders often increase the risk of ruin by trying to make the system into a perfect one. The future is rarely the same as the past, thus the pitfalls of curve-fitting are always present, no matter how tempting it is to fiddle with the strategies to make them perfect.

A simple system with few variables will likely last longer than one with many variables.

Reason 12: Day traders force trades – why day trade?

Many traders start by having a goal of making, for example, five trades per day. This is, of course, the wrong approach. You can’t force trades, you need to take what the market offers. If you can only find strategies that trade on average two times per day, then so be it.

We suggest you widen your horizon and include trades that might last over many days – swing trading. A trader needs to be agnostic and open to all market opportunities. 

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 14: You are not rational and agnostic – can’t learn

Trading is a perpetual state of learning. You can only learn by being rational and open to changing your opinion – being agnostic. The self-serving bias is in-built into all humans. We take credit for good outcomes and blame others for bad outcomes. This way, you ensure you don’t learn from experience and your decisions. A good result is not necessarily because you made a wise decision! Likewise, a bad outcome is not necessarily a result of a poor decision.

Annie Duke writes in Thinking In Bets that in multiple-vehicle auto accidents, 91% of the drivers blamed someone else for the accident. Don’t be one of those. All decisions are yours, and there is no luck or bad luck in the markets (long-term).

Reason 15: Do a lot of trading – overtrade

Overtrading is one of the worst traits you can have as a trader.

What are the reasons for overtrading? Here are some:

  • After a good day, you would like to “test something new” on the spot.
  • Lack of patience.
  • Free commissions.
  • Lots of software, info, indicators, bells, and whistles.

The opportunities for becoming a losing trader have never been better: free commissions and lots of info are a recipe for overtrading. Free commissions make you blind to the real costs (slippage), and an abundance of information makes you overconfident in your analysis. You become complacent. As Nassim Taleb says: If you want to bankrupt a fool, give him lots of information.

Mr. Taleb is a guy worth listening to.

Reason 16: Delay gratification – think short-term

A zillion research papers show the importance of delaying gratification in any field. Pension is one of them. Saving for retirement is next to impossible for many because the joy of spending today is immediate. Saving means the pleasure is way distant decades ahead.

I guess you have read about the Marshmallow experiment? An American psychologist tested the ability of four-year-old children to delay gratification. Just like children are bad at delaying gratification, traders don’t want to take their time to learn trading skills. Trading is a profession like no other, and it takes years to learn. By being impatient and unable to delay gratification, you risk the temptation of instant success instead of working relentlessly and consistently to get the good long-term returns you want.

Make sure you survive

Many only move to day trading when they’re looking to make a quick buck. But trading is about protecting your capital so you can live another day to trade. If you’re spreading a quarter of your investments with each new trade, then you’re not going to survive for very long. A few losses will be enough to take you down. This is something you need to keep in the back of your head at all times.

How to NOT Fail as a Day Trader

Day trading an inverse thinking to not fail in day trading

What is inverse thinking? This is when we turn a problem on its head or look at it backward. If a newspaper headline claims one-third of the population is against passing new legislation, it also states two-thirds approve it. You might develop a strategy that performs well on paper, but instead of trying to approve the strategy, you might want to kill it. If you can’t find any reasons why it shouldn’t work, you may be onto something.

Similarly, by looking at failed traders, you can find out what NOT to do. This article listed many reasons how to fail as a trader. By making sure you don’t follow what sloppy traders do, you might stand a better chance. 

What is inverse thinking?

Inversion involves thinking and focusing on the opposite of what you want. If you want to be a successful trader, learn what it takes to be unsuccessful (and avoid that). Mr. Munger claims he has been very successful by studying how to prevent mistakes and remove errors. After all, if you avoid managing failure, few options remain.

Presumably, The Stoics used the same logic and thinking to overcome fear and negative experiences. Done correctly, inversion is a potent tool that can be used in all aspects of daily life. Just think about it: life is a journey where mistakes are made daily. By inversion, you can spot and track potential pitfalls before you do them.  You can be successful at your job by showing up on time every day, even though you’re not particularly smart.

We at Quantified Strategies are not particularly smart either. But we have managed to become moderately successful traders and investors for over two decades simply by making sure we:

  • Survive another day.
  • Removing markets and strategies we know are difficult to trade.
  • Avoid investments we don’t fully understand.
  • Make sure we don’t make the same mistakes over again.
  • By not trying to be smart and advanced.
  • By focusing on simple strategies in markets where we can get an edge.

Most energy is spent on avoiding strategies, markets, and behavior that are difficult to master. For example, we are not involved in penny stocks or forex.

Backasting and premortems

In her book Thinking In Bets called Backcasting and Premortem, Annie Duke offers a different but somewhat similar approach. Mr. Munger praised this book.

Backcasting starts with a positive end result, and you imagine how you ended up there. For example, you look at yourself as a successful trader ten years in the future, and you write down reasons and plans on how you ended up successful.

Likewise, you can imagine a negative result in ten years. Annie Duke calls this premortems. Forensic crime dramas are full of postmortems where a medical examiner determines the cause of death (after it has happened).

premortem is an equally bad investigation (as you end up unsuccessful), but before it happens. How did you end up as an unsuccessful trader? Duke argues we are generally biased to overestimate the probability of good things happening. We imagine ourselves as successful traders, even though almost all fail. Being positive is generally good, but being realistic and rational is not bad either.

By imagining obstacles to reach your goal, you are better prepared to avoid and circumvent those obstacles. Dreaming about achieving a goal won’t help. You need to behave in the correct ways that make your goal realistic.

Few ways to win, many ways to lose

There are so many ways to lose, but so few ways to win. Perhaps the best way to achieve victory is to master all the rules of disaster and then concentrate on avoiding them.

– Victor Niederhoffer

This quote from The Education of A Speculator is a brilliant one. It captures the essence of inversion. To not become a failed trader, focus on the pitfalls. However, it didn’t help Niederhoffer from going belly-up with his hedge fund.

Why day traders fail – conclusions

Make sure you are the predator and not the prey and use the ecology of the markets to your advantage. Accept that losing trades are part of the game, thus you need to control your losses.

Make sure you have a plan and only trade strategies that are backtested and quantified, and that you are diversified in terms of trading many uncorrelated strategies. Use the law of big numbers to your advantage and detach yourself from money and the financial outcome.

But finally, let’s be honest: Why day traders fail is because they have absolutely no clue what they are doing. Most fail at the starting line because they have no clear plan, they simply don’t know how to make money, and they don’t understand the markets.


How can understanding market ecology improve day trading success?

Understanding the competitive nature of day trading and recognizing it as a zero-sum game is important because you know who the market players are, and identifying rivals and predators is essential for success.

Why is having a trading edge important for day traders?

A trading edge is crucial for day traders as it increases the probability of success. Without a quantified strategy with a higher-than-50% win rate, day traders may struggle to make consistent profits.

What is the significance of a trading plan in day trading?

Having a trading plan is key to day trading success. It covers aspects like market choice, strategy selection, trade management, time frames, position sizing, and risk parameters, providing a roadmap for effective trading.

How does inversion apply to life beyond trading, and what benefits does it offer in daily decision-making?

One needs explore how inversion can be a powerful tool in various aspects of daily life, helping to identify and navigate potential pitfalls. Premortem is a strategic technique that involves envisioning a negative outcome before it happens, allowing traders to identify and address potential obstacles and pitfalls. In the context of trading; Premortem enables traders to assess potential risks and develop strategies to mitigate them, evisioning failure allows traders to adapt their plans and strategies accordingly and also it argues that individuals tend to overestimate the probability of positive outcomes.

How does a lack of understanding of probabilities hinder the development of quantified trading strategies?

Probability is central to risk management in trading. Traders need to assess the likelihood of different market scenarios to implement effective risk mitigation strategies. In trading, having an edge means having a statistical advantage over random chance. Quantified trading strategies rely on statistical analysis and historical data to identify patterns and trends. Traders must learn about the importance of understanding probabilities, statistics, and quantifying strategies for effective decision-making in trading.

Similar Posts