Why do most day traders fail? Successful vs losing traders - Phemex Blog (2024)

Cryptocurrency trading is where high risk-tolerance investors trade volatile assets to make a profit. However, as easy as it may sound, most traders actually don’t end up making great profits. Every market has its risk, but cryptocurrency markets are particularly unforgiving. Crypto prices can rise and plummet in mere minutes, and while this volatility is precisely what makes them so profitable, it can also completely destroy those who don’t manage their portfolios sensibly.

In this article, we’ll explore the main reasons why most traders end up losing money trading cryptocurrencies, and how you can avoid these pitfalls on your journey to becoming a successful trader.

Why Do Most Day Traders Fail?

There’s a measurement for this, and it’s called the day trader failure rate. According to statistics, 95% of all traders fail. This doesn’t mean that you have a 95% chance of failure, but rather for every hundred traders entering the market, statistically only five make a profit. That’s a high ratio that begs the question, why do so many traders lose money?

5 Reasons Why Most Day Traders Fail

1. Not having a plan

Most people who start trading do so without a trading plan. Having a clear and concise trading plan is essential for success, and will help keep you disciplined and focused when emotions start running high.

Your trading plan should outline your investing goals, risk management strategy, your entry and exit points, and any other rules or guidelines you want to follow. Without a well-defined trading plan, inexperienced traders’ emotions will take over and result in impulsive decisions.

2. Too much leverage

Another common mistake made by losing traders is over-leveraging. Leverage is where you borrow money from a broker to increase your position’s market exposure. While leverage can be a powerful tool to help make large profits from small investments, it can also lead to life-changing losses if used recklessly.

For example, let’s say you have $1,000 in your trading account and you use 10x leverage to buy $10,000 worth of Bitcoin. If the price of Bitcoin goes up 10%, you’ve just made a 100% return on your investment. However, if the price of Bitcoin goes down 10%, you’ve just lost your entire investment.

As you can see, leverage can be a double-edged sword and should be used with caution.

3. Poor risk management

Risk management is arguably the most important aspect of trading. While it can’t directly help with making or losing money, it does help with managing how much money you could make or lose on a trade, muting potential gains and preventing runaway losses. Unfortunately, it’s also one of the most commonly overlooked aspects by losing traders.

There are a few different risk management strategies you can use, but one of the most important is setting up your stop loss orders. These are orders that can be configured to trigger when the market price for an asset touches a certain value. Of course, there are no guarantees that your order will be filled at your specified price, but it can help in facilitating your existing trading strategy, as well as helping you exit a losing strategy.

Another piece of advice often given to newer traders is to never risk more than 2% of their account balance on any single trade. This may seem like a small amount, and more experienced traders will undoubtedly flaunt this rule in the form of larger trades or through leverage, but following this rule (or a variant of it) ensures you don’t blow up your entire account when a trade goes against you.

4. FOMO and FUD

FOMO is a powerful emotion that can cause even the most disciplined traders to make impulsive decisions. FOMO typically sets in when you see a cryptocurrency rising rapidly in value. Everyone around you seems to be profiting from this, and you feel the need to buy in immediately before you lose out.

However, more often than not, these types of trades end up being losing trades, since markets almost always correct after a sharp rally, and the hype becomes priced in.

The other end of this is FUD, which causes investors to panic-sell into losses during a bear market, often because people around them are spreading negative sentiment.

The best way to combat FOMO and FUD is to have a well-defined trading plan with clear entry and exit points. This will help you stay disciplined and only take trades that fit your criteria.

What Percentage Of Day Traders Are Successful?

According to Vantage Point Trading, the day trader success rate is estimated at only around 10%. This is a very low ratio, especially when considering how most day traders risk 1-2% of their portfolios on each trade. But what really differentiates the 10% of successful day traders from the 90% of losing traders? Let’s take a look at a few key traits that successful day traders have in common.

5 Signs of a Successful Day Trader

1. A rational mindset

The biggest difference between successful and losing traders is their mindset. Winning traders have a positive and disciplined mindset while losing traders often let emotions get in the way of their trading.

If you want to be a successful trader, it’s important to develop a positive and disciplined mindset. This means having a clear and concise trading plan, sticking to your risk management strategy, and staying calm and objective when making trading decisions.

2. Strategy over tactics

One of the biggest differences between successful and losing traders is their ability to stick to a strategy. Winning traders have a well-defined trading strategy that they never deviate from, but they also have the skills to rearrange their tactics to maintain their broader strategic goals.

A good trading strategy should be simple, easy to follow, and based on sound principles of risk management and market analysis. By sticking to a simple and effective trading strategy, you’ll increase your chances of success in the long run.

3. A risk-averse approach

Winning traders also always have a clear and defined strategy to manage their risk. This might mean only risking 1% of their account balance on each trade or setting a stop-loss order to cut their losses if a trade goes against them.

Risk management is an essential part of trading and should never be ignored. By having a sound risk management strategy in place, you’ll be able to protect your capital and preserve profits even when markets go against you.

Disciplined Trading vs Trading ‘In The Zone’

When it comes to trading, there are two main types of traders: disciplined traders and those who trade ‘in the zone’.

Disciplined traders are those who stick to their trading plan no matter what. They have a predefined set of rules that they follow and they never deviate from them. This discipline is what separates them from losing traders. For example, a disciplined trader will always stick to their risk management strategy and never risk more than a certain fraction of their account balance on a single trade.

Disciplined traders are often able to preserve their capital even during tough market conditions. This is because they stick to their trading plan and don’t let emotions get in the way of their decision making.

Those who trade in the zone are a bit different. These traders are often described as working ‘in a flow state’ or ‘in the moment’. They’re so focused on the task at hand that everything else fades away. This focus can help them make quick and informed decisions that result in profits.

They don’t have a set trading plan, instead relying on their intuition and gut feeling (developed through experience) to make trading decisions. While this approach can sometimes be successful, it’s often more prone to errors and big losses.

Conclusion

There are no perfect strategies that guarantee profits. However, by understanding the key differences between winning and losing traders, you can develop a trading strategy that works for you. Remember, discipline and having a well-defined trading plan are essential for success. So stick to your strategy and don’t let emotions get in the way of your decisions.

The most important thing to remember is that trading is a marathon, not a sprint. It takes time, patience, and discipline to become a successful trader, so don’t be too discouraged by a few losing trades.