There is an unbelievable number of people who find the topic of trading fascinating, but they lose a lot of money instead of making it. With this article, we want to shed some light on the five reasons this happens, to prevent you from these mistakes.
We often see beginner traders risk money in the financial markets with little or no knowledge. Of course, we can understand the enthusiasm of these people, but it’s hard to see how frivolously this hard-earned or even saved money is thrown out of the window.
Nobody would think of flying an airplane or performing a heart operation without training; everyone knows that this requires training. That’s exactly how trading is. It is no coincidence that 90% of all private traders lose money, whilst the financial sector still makes huge amounts of money. What separates these two groups? The answer is simple: knowledge!
If you have the necessary knowledge, you can react to situations correctly, protect your money, and maximize profits in the right spots.
Restraint in spending on education
What strikes us is that successful traders always gain back the money that they have invested in training. There are very few failed traders who have invested a lot of money in gaining knowledge.
Benjamin Franklin stated: “An investment in knowledge pays the best interest.”
In the short term, the majority of traders only see the problem with no direct return, and they lose sight of the long-term picture or underestimate it.
Patience is the key to success
An essential part of the victory of a successful trader is the ability to wait. Not every trade pays off immediately, and not every single trade has to be a winning trade. Losses are included, and it is worth waiting for good trading spots. It can be the case that as a daytrader, you do not trade one day or as a swing trader for several days. Likewise, it can happen that options traders do not trade for 2 weeks.
It is difficult to learn this patience, which is probably another reason why not everyone is born to be a trader. The fact is, however, that impatience costs money and that in turn costs performance.
False expectations lead to frustration
One issue that we repeatedly address is the false expectations of beginners. You hear utopian returns of 100% a month in the media, and you count up those numbers. Of course, you quickly hover on cloud 9 and think the whole thing is a breeze. It is not like that. It is and will be hard work!
If you achieve an annual return of approx. 30% in the long term, this is an outstanding result as a private trader. But if you look at this number on a monthly basis, it’s just 2.2%, and if you tell this to a newcomer to trading, he will wave off and hang the topic of trading on the hook. He usually does this for 3 reasons:
- He forgets the powerful compound interest effect
- He often looks at his low start-up capital
- He hides the very bad alternatives
Everyone wants to get rich quick, but that’s not how it works. We can assure you that all providers who promise this are very dubious!
Another important way to grow the account over the long term is additional deposits. However, this should only be done if profits are already steadily being made. The effect is amazing. Without further deposits, after 20 years and a return of 20% p.a. with an initial capital of $5,000, a final capital of $191,700 achieved:
If, on the other hand, you deposit $100 every month, which would result in $24,000 in 20 years, the final capital is much larger:
The final capital doubles. If you look at the alternatives, there is no argument why you should not pay into your own account.
Available capital and financial instruments
The last aspect is difficult to avoid or bypass. The fact is that you cannot always trade all instruments with a small account. This limitation may negatively impact performance. However, if you take into account that money management with a large account is done much more conservatively, this disadvantage almost disappears. In addition, more and more brokers have an ever-larger range, and traders with small accounts can trade almost anything.
Options and futures
The topic of futures does not really limit beginners because they can always rely on a CFDs. The broker’s offer is only important for special trades where the exact term of the futures is decisive.
One problem that traders with small accounts have no solution for is options trading. Options trading requires a larger account and cannot be made with $3,000. Options trading plays more than a small role in high finance and enables a whole new world of ideas to be implemented.
The latter aspect should not deter newcomers to trading who have the right enthusiasm, patience, discipline and passion for the subject of finance. Everyone can become a successful trader, and we are happy to support you on your journey.