Why do most day traders fail?

Over 90% of active day traders fail in their first year – and 85% call it quits within three years. Here’s where they go wrong.

September 21, 2023
8 minutes
Trading Education

Despite what you see on social media, becoming a day trader won’t make you a millionaire overnight. Actually, making money as a trader is one of the most difficult things to do. 

Even when new traders make profitable trades, they often struggle to keep it. Less than 1% of active traders make consistent profit. 

Don’t get disheartened. There are some real – and fixable – reasons for this. 

Today, we’re going to talk about why so many day traders are unprofitable – and how you can avoid becoming one of them. 

Reason #1: They have no base knowledge

To be blunt: most day traders have no idea what they're doing.

You can’t expect to dive into a new job or hobby and be good at it immediately. Everything takes practice and education. Trading is no different. 

You need real education to understand how the market works. 

Just watching videos isn’t going to magically make you a great trader. Most learning happens when you start putting it into practice. Once you have the education, you have to apply it – and this is the most difficult part. 

Before putting your own money up, start with paper trading. This helps you to get a feel for the markets and the platform you’re using.

Even when you start trading with real money, your education isn’t over. You’re still learning about what mental blocks and emotions come up once real money is involved.

If you’re not happy to implement the strategies you mastered during paper trading with real money, go back a step and do more testing. 

Reason #2: They have no ‘edge’

To find your edge, you need to identify strategies that fit your personality. 

For example, some traders try to scalp, but don't have the personality to be fast. They just copy strategies from successful scalpers that they see on social media and try to trade exactly like them. 

Watching others is a good way to learn but, if you want to be a successful trader, you need to go deeper. You can take bits from other traders but you need to understand why they do what they do. 

From there you can start developing your own personal approach and what works for you. This is your ‘edge’ – what you bring to the market.

You need to define:

  • the success rate of your strategies: you can find this through backtesting.
  • what strategies work best with your personality
  • what strategies you are going to use
  • what your approach to the market is going to be.

From there you can build out your trading plan. 

Reason #3: They hop between strategies

Experienced traders will tell you that success is all about consistency. Many day traders have the potential to succeed – they have a good understanding of the markets, they have a tried-and-tested strategy and they have an edge. 

But then their edge stops working. They panic, and they abandon that strategy. And that’s where it all goes wrong.

Don’t abandon a proven strategy the minute it stops working. Remember, strategies only work under certain market conditions. 

Try to understand why it’s no longer working instead. 

Maybe the market has adjusted. Maybe you’ve chosen a few bad trades. Or maybe it’s not a strategy and was just a run of good luck.

You need to put in the time and effort to understand all the different factors and identify what’s going on. From there, decide if you should hold your strategy or adapt it. 

Reason #4: They lack patience and discipline

Some day traders have the technical stuff down but lack the personal qualities for success. 

They don’t have the discipline to follow their plan and execute when they said they would. They don’t have the patience to wait for trades to formulate. They wake up and rush to put on trades. They rush to make money.

This is a personal problem rather than a trading problem. 

If you're having a hard time being disciplined or being patient in your trading, step outside and develop these skills in other aspects of your life. You can’t be disciplined in trading if you have no discipline in your personal life.

You need to learn how to listen to yourself, commit to plans and follow through on them. 

A good place to start is with the gym. Commit to going to the gym at the same time each day and following a training plan. Once you start showing up for yourself in our personal life, you’ll start to see it bleed into your trading. And vice versa. 

Photo by Karsten Winegeart on Unsplash

You need extreme discipline and patience to be successful, as trading involves a lot of waiting. 

Reason #5: Their time horizon is too tight

A lot of newbie traders only give themselves a few months to achieve consistent profits.

This creates a lot of pressure. And trading is already stressful – you don’t need to make it more difficult for yourself. 

You’re just starting out, so lose that little voice that says “I need to be profitable within two years”. 

Instead, give yourself space. Don’t focus on money or profits. Instead, focus on becoming a better trader. Spend that time learning the markets, identifying your edge and seeing what works for you. 

This insight will help you to forget about the money, and focus on your craft instead.

Reason #6: They don’t track their trades

Treating your trading like a business is really important if you want to be successful, and this means tracking metrics like any other business owner would.

To evolve as a trader, you need to understand your metrics. You need to understand what areas you’re struggling with. 

The best way to do this? Track every single trade you take. Track metrics like:

  • Stop loss
  • R multiple 
  • Why you entered the trade
  • Why you exited the trade
  • Pre-market game plan
  • What you actually did
  • Outcome of the day. 

It’s super important to understand what is causing you to lose money, where you’re making money and whether you’re leaving money on the table. 

The only way to learn these things is if you track, journal and analyze your trades. Find out more in our ultimate guide to creating a trading journal and using it effectively.

Reason #7: They don’t understand their own minds

Everyone is different. To be successful as a trader you need to understand your own mental blocks and what is impacting your trading from a personal, psychological level.

For example, some traders have a really hard time following their stop loss. They don't want to lose money, so every time a trade comes close to their stop they start thinking “this will go higher” and they keep the position open.

And some traders have a really easy time following their stop, but find it hard to wait and let a trade formulate the way it's supposed to. 

You need to figure out which psychological problems pop up in your trading. Once you know that, you can create a system to tackle these issues head-on. 

Until you figure out your own mind, you’re unlikely to succeed. Tracking your thoughts and feelings in a trading journal can help with this.

Find out more about the role of psychology in trading, and how it results in common pitfalls.

Reason #8: They have unrealistic expectations

It’s good to be ambitious, but having a high bar adds too much stress when you’re just starting out. 

Setting goals shouldn’t be about saying “I’m going to make $100 thousand in my first year of trading” – it should be about identifying problems and celebrating small wins. 

Some small wins to focus on are:

  • Identifying what strategy makes you the most money 
  • identifying what causes you to lose the most money 
  • Figuring out the mental blocks or psychological problems that bleed into your trading
  • Creating a system to tackle those problems. 

If you start trading today and make small wins like these in your first six months, imagine where you'll be in a year’s time. You’ll have so much knowledge and understanding, and that just compounds.  

This is much more important than thinking “in six months I need to make a million dollars”. 

Focus on what it means to be a good trader, and the money will come.

Reason #9: They don’t know how to lose

To be a successful trader you need to put your ego to the side, and be okay with losing. 

Most of the time in trading, you will be wrong. And when you are, you need to understand why.

A lot of day traders give up because they can’t handle loss. They’ll have a few amazing weeks or months, but when they eventually lose they become erratic. 

Obviously losing can be upsetting, but you’ll get back on track quicker if you can stay calm. Our tips on how to recover from a trading loss should help.

You need to plan to lose money in each trade: 

  • How much will you lose if the trade goes wrong?
  • What are you comfortable losing?
  • What amount is okay in proportion to your account size?

There are ‘good’ losses and a ‘bad’ losses. If you followed your gameplan, it’s a ‘good’ loss. You followed your market, you had your edge, but this time it didn’t work. You just need to live with it. And, if you lost the amount that you planned to lose, it’s fine.

However, if you threw out your gameplan and lost more money than you meant to, this is a ‘bad loss’ because you didn’t stick with the plan. You let your emotions and psychology get the better of you. 

Reason #10: They have no risk management in place

The final reason so many day traders struggle is that they don’t have risk management strategies in place. 

Remember: the market is unpredictable. You can’t manage the outcome of a trade, or whether it will go higher or lower. You can just manage risk. 

To do this, think about what happens if things go wrong.

Obviously no one wants to lose money. But it’s just a fact of trading. You need to be a good loser, and part of that is knowing how much money it’s okay to lose.

Before taking on a trade, decide on your stop loss. This is the level where you accept that you were wrong and abandon the position. For example, where you can lose $2,000 instead of $20,000. 

Doing this lets you control your loss. You can’t control whether the day is going to go up or down, but if it does go down you know what the maximum amount you’re going to lose is.

Learn more in our definitive guide to risk management in trading.

Go forth and be a successful trader

Now that you know where most day traders go wrong, you can avoid the major pitfalls. 

Using trading journal software like TradeZella can help. 

As well as giving you space to track your trades, TradeZella has other features to help you with other points from above.

You can see which strategies are working – and which aren’t – straight in your Playbook. Improve your knowledge in Zella University. Get to know your own trading psychology, and get comfortable with risk management as we show your R-multiple right on your dashboard.

Sign up for TradeZella for the tools you need to succeed as a day trader.

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