12 Reasons Why Day Traders Fail (Avoiding The Common Pitfalls Of Day Trading)

Why day traders fail boils down to at least 12 reasons. This article explains why day traders fail and what you can do to survive and perhaps even prosper.

Why day traders fail is mostly 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:

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.

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 chances of making a profit.

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 being successful, which can be translated 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.

If you are unsure where to start, you might want to subscribe to our Trading Edges. Once a month we share a simple quantified backtest that you can either use or improve yourself. Some of the Trading Edges are day trades:

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.

And please make sure you have a trading journal – we have provided you with a trading journal example.

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.

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: Day traders fail because they trade too big

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