A few weeks back, I began a three-part series answering a very direct question: What causes failure in trading?
This has been a no-nonsense, nuts-and-bolts look at the question. This has not been a philosophical dissertation or a deep dive into human psychology.
In Part 1, I discussed the “lack of discipline” as the first true reason for failure. In Part 2, I cited the inability to focus as the second reason for trading failures.
Reasons for Trading Failures and Trading Success
Today I will discuss the third and final reason why many traders and investors fail to achieve their goals.
Now there may be other reasons, but from my experience in working with so many aspiring traders, these are the top three.
To clarify again, most people actually fail because they do not get an education. However, that is a decision that people consciously make. I want to discuss why even those who really try can still fail.
The Plan and the Follow-Up
Reason No. 3 is the inability for traders to plan and follow up. This is a fairly broad topic; however, it’s one I believe is among the most important.
Going into anything new requires planning.
Coaches create game plans for upcoming games.
CEOs create plans to build and grow companies.
Students create plans to graduate and get jobs.
But what good is a plan if you do not have the discipline to follow it in the first place? What good is a plan, if it is so expansive no one can review it accurately to see if it was followed?
When I talk about planning, I am not talking about planning with a small letter “p.” I am not talking about just knowing when your stocks are reporting earnings. That is not a plan.
I am talking about planning the big letter “P.” I am talking about the Trading Plan. By trading plan, I mean a very detailed plan of what you are going to buy (or sell), when and why. That means knowing in advance what your risk is on the trade (i.e. how much are you willing to lose and why?), knowing how you are going to manage the trade in the event it starts working (i.e. implementing trailing stops) and having an expectation of where the trade could go and why. That is a plan.
The other half of this third reason for trading failures is the inability to follow up. No trading plan is worth anything if it is not followed. If you are not sticking to the plan you are just wasting your time and your money.
It’s no different than the person who buys the weight-loss plan but doesn’t stick to the rules – or only sticks to the plan when they feel like it.
You get out what you put in.
Again, the No. 1 reason for trading failures is that traders do not receive a quality education.
As much as I’m a hardcore believer in education for the trader, education in and of itself does not guarantee success.
Education however, combined with discipline, focus and the ability to create and follow a functional plan are the most important things anyone can do to ensure they will have the best odds in the market over the long haul.
Trading and investing is not hard but it does require time and effort. If you don’t know the pitfalls in advance, or if you think that these things don’t apply to you, your effort is futile.
My 20 years of experience has taught me many things, and of all those things, these three are among the most important elements I can pass on to you. I hope this helps you think about how you think.