Why Most Day Traders Lose Money

Are you curious as to why most day traders lose money?  Most traders lose money because they don’t truly know how to day trade or even how to read a price chart, but after losing money in the early stages, why do they continue to donate their hard earned money to the markets day after day?  Very few day traders that attempt to become day traders give up until they blow their entire original starting account, so why is it that they don’t quit or stop the insanity long before they lose all of their trading capital?

Why Day Traders Lose Money

Why Day Traders Lose Money

Most of the reasons that day traders continue to lose money is related directly to many of the same psychological reasons that humans get addicted to any negative activity, such as gambling, drinking or any other abusive vises.  Deep down they know that they are wrong and that they should stop, but the lure of getting their money back keeps them at it until eventually, most lose their very last dollar.  I get emails on a regular basis from traders telling me that they just wiped out their trading account, and many are telling me it’s not the first time either.

These losing traders want to know what they must do differently in order to turn their losing ways into winning ways.  Normally my very first question to them is to ask if they were ever able to make money consistently on a simulator before they even attempted to trade live?  Most will tell me that they have never traded the simulator at all, or if so, for only a few days at most.  Think about this for a moment:  If you have never been able to make money consistently on a simulator, why would you think you could make money day trading a live account.  Would you hop in 747 airliner and attempt to fly it without first getting some lessons and hopefully some real training on a simulator first?  If you continually crashed while flying on the simulator, would you actually think you could fly the real plane?

I think the answers are obvious, and trading a live market, particularly one of the index futures without getting the proper training and experience first is no different than jumping behind the controls of a 747 and attempting to fly it without having some training and experience on a simulator first.  I ran across an article at www.hindubusinessline.com that talks about many of the reasons that day traders become addicted to losing.  Below is a small excerpt from that article.

Most day traders end up with losses most of the time or at best with marginal gains. So, why do individuals day-trade?

To understand this behavior, let us turn to gambling. Suppose you visit a casino. If you bet your money on, say, the slot machine and miss winning by one number, will you walk away disappointed? Or will you bet again?

If you are a typical individual, chances are you will want to bet again. Why? Research in neuroscience has shown that near-miss events activate the Nucleus Accumbens (NaCC), which is your brain’s reward-pathway. The NaCC becomes excited when it experiences reward, or even near-miss events. And when the NaCC is excited, your brain is flooded with dopamine, a naturally-producing chemical that pleasures the reward system. You typically indulge when you are high on dopamine, which means you are more likely to try another hand at the slot machine.

Besides, your brain is always looking for patterns or pattern reversals, even if there exists none. That is why you are likely to continue betting even if you lose three or five consecutive bets; for you expect a reversal in your fortunes, perhaps, too soon. There is a term used to describe this behavior. It is called gambler’s fallacy because there is nothing in the rules that states that your fortune should reverse just because you lost five consecutive bets.  You can read the rest of the original article here.

According to this article, there are some physiological and psychological reasons for the insanity that we often see by day traders, who are really nothing more than gamblers if they don’t have the proper training and experience.  There are things going on in your brain that you can not control that lead you to make many of the mistakes that you make when day trading.  These chemical reactions in your brain make it hard enough to make money alone, but when you throw in the fact that most of these traders never really learned how to trade, nor have they gained any real trading experience, then you can see how it quickly leads to disaster and the loss of their money.

The first thing a trader must do is begin to learn how to read a price chart.  Any trader that is consistently making money as a day trader has the ability to read a price chart.  They may call it something else or even use other tools to assist them, but if they are making money on a consistent basis, then they have some knowledge of how to read a price chart.  We call this price action trading, but it’s nothing more than the ability to use current and past prices on a chart to track the footprints of the traders, thus gaining an edge on understanding what is likely to happen next.  If you truly learn to read a price chart, you will not need any additional tools or indicators, and in fact, you will learn to loathe indicators completely in the end.

As a trader begins to get a feel for how prices react, along with what to expect when prices are printing to a chart, you will slowly begin to understand why prices are doing what they are doing, and why they reversed where they do, or why the trend continued onward where it did.  There will be less surprises, thus allowing you to capitalize on large moves rather than get hurt by those moves.  Once you understand how to read a price chart, it’s then all about getting experience doing it in real time on the simulator.  When and if you can make money consistently on the simulator for an extended period of time, then you can attempt to trade a live account with your real money, but not a day or trade sooner than that!

Hopefully you now have a better understanding of why most day traders lose money.  If you would like to learn how to read a price chart and how to trade with proven price action strategies, you have come to the right place.  We can help you with your trading education and help you to learn how to day trade with price action like a professional.  In addition, we can show you where you can get a free NinjaTrader simulator account with live trading data so that you can get that simulation experience that is necessary to prove you can trade.  If you want learn more about our price action trading strategies, you can find that information at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.