Why day traders lose money?

Day traders lose money for several reasons. One, a day trader does not have a sound and profitable day trading strategy. Two, a day trader is extremely undisciplined and reckless. Three, a day trader does not have any money management plan that he or she can fall back on during the draw down period of a trading strategy.

Trading Strategy

A trading strategy is one of the most important part of trading. A trading strategy is what gives a trader signals for when to buy and when to sell. This strategy must not only be fully understood by the trader, but also back tested over a number of trades to make sure the strategy has positive expectancy. Many beginner traders do not understand strategies and end up switching from strategy to strategy in hopes of finding the Holy Grail. What must be understood is that any strategy has times where it works and times where it doesn’t. A profitable trader understands this concept and therefore minimizes risk during times of draw downs when the strategy is not working. A losing trader gives up on the strategy during this same period and runs after a different strategy.

Discipline

Being undisciplined and reckless while day trading is probably the number one reason why most traders fail. How do you define being undisciplined or reckless? Reckless trading is trading without a stop loss order. Reckless trading is averaging down on losing position and not divorcing yourself from a losing position. Being undisciplined can be defined as not following your trading plan, making up trades as you go along, taking trade based on emotion or not following your loss limits whether they be daily, weekly or monthly. Over trading can fall into either reckless or undisciplined trading. If your trading plan calls for 2 or 3 trades per day and you’re taking 10 trades a day, you are over trading and you will lose in the long run. If a disciplined and patient trader takes only high probability trades and those trades fail, they will not get emotional, but will wait for another opportunity.

Money Management

Money management is just as important as the first two reasons. Most day traders not even understand the concept of money management. Money management might mean different things to different people, but over all what money management means is having control over your account and knowing how much to risk and how much profit to take. There are many people who start trading with a $2000 account and start trading 3 or 4 contracts with a discount broker because of low margin ($500 margin per contract). What they do not think about is what if they have 3 or 4 losses in a row, unfortunately they are only thinking of the gains and not the losses. A trader in this situation can have 3 or 4 losses of $200 or $300 each and will easily blow out the account and have to start trading just one contract or not be able to trade at all because of emotional reasons. Rule of thumb, your risk amount should be 5% or less of your trading account.

Overall, a day trader has to worry about all three things simultaneously because you cannot day trade profitably worrying and thinking about just one of the above three. If a day trader has a mediocre trading strategy, but good money management and discipline built into the trading plan they will be a profitable trader. Whereas, if a day trader has a perfect strategy, but no money management or discipline, they will lose money at the end.